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What if Coronavirus Never Ended the Bull Market?

Last Updated September 23, 2020 1:48 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 1:48 PM
  • Most would agree that stock markets entered a bear market in mid-March, as indices plunged more than 20% from their peak.
  • Ritholtz argues that the bull market that started after the financial crisis has never ended.
  • Even if we are still in a bull market, it might end soon as the economy stares down depression.

Some analysts believe the stock market has already bottomed . But what if the bull market never actually ended?

After the sudden collapse of the stock markets in mid-March, the general assumption was that not only the bull market had ended, but a bear market had started. It typically takes an average of 255 days for the indexes to drop 20%  from their peaks. The last dive was the fastest ever recorded, in just 17 days.

But there is now a new bull market as U.S. stock indexes have increased more than 20% from their March 23 lows. Some analysts believe the stock market has already bottomed, while others think the bottom hasn’t been hit yet. Markets strategist James McDonald thinks the Dow could plunge to 15,000 .

Dow Jones, DJIA
The Dow is rallying after plunging 35% from its peak. | Source: Yahoo Finance 

But Barry Ritholtz, chairman and CEO of Ritholtz Wealth Management , argues that the events of this spring may just be a cyclical bear market in the context of a longer-term secular bull market. It has happened before.

We Might Still Be In A Bull Market

Ritholtz believes that maybe the secular bull market didn’t end even if stocks fell about 35% from peak to trough. Secular bull markets are long periods with a consistent set of factors driving stock prices higher. These include economic expansion, wage gains, revenue growth and profit increases. There are giant counter-cyclical moves, but that doesn’t mean the bull market is over.

Ritholtz thinks that what we saw in the markets was a counter-trend selloff caused by an externality. It’s not the same as a standard recession or a financial crisis. The U.S. economy was in good shape before the coronavirus arrived.

As soon as the externality is behind us, if the underlying factors that drove the U.S. economic expansion are still there, the bull market should continue.

Slow Recovery Could End The Bull Market

The speed of the recovery will depend on how quickly we control the spread of COVID-19, when a treatment will be available, and when the economy will reopen for business.

If we get past it quickly, the prior expansion could continue. But what will happen if the recovery is slower than we expect? It’s possible that the economy enters a severe recession, even a depression.

Economist Stephen Moore has warned  that the United States could face a Great Depression if the economy is not revived next month due to the damage caused by the coronavirus pandemic.

Moore said the unemployment rate in the country could worsen as the coronavirus spreads, reaching 23%. Unemployment reached 24.9% in 1933 during the Great Depression.

Morgan Stanley’s economists forecast a 38% drop in second-quarter U.S. GDP and a slower-than-expected recovery: 

We expect the U.S. economic recovery will be more drawn out than previously anticipated, marked by a deeper drop into recession and slower climb out.

If such a dreadful scenario happens, the bull market might end for good. The coronavirus might be a temporary disruption, but it could change the way people act for a long time. They will likely be more hesitant to travel and go out, and might save more.

That lower spending will hit companies’ bottom line and the stock market. IHS Markit said in a research note  that it could take two to three years for most economies to return to the levels of output they had before the pandemic.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.