Market Overview

28 February 2020

Is the "Mad Hatter" Phase of a Clinically Panicked Market Close to Its End, At Least?

The Wall Street's major indexes crashed for the sixth straight session this week. The S&P 500 stock index lost almost 500 basic points by plunging near to 15% below the level of its February 19 record close and confirmed its fastest correction in history, according to S&P Dow Jones Indices analyst Howard Silverblatt. The previous record was about a 12% fall for nine days in early 2018, but it was "only" 345 basis points at that time. The markets were spooked by a proposed slowdown in the Chinese economy then. The Dow Jones index registered a record one-day points drop yesterday, which was also its fourth 1,000-point decline in history and the second this week.


The severe correction happened in 2018 after the first 33% wave of the so-called "Trump rally" which lasted more than 14 months. The same 14 months after the plunge were filled by the next wave of market growth that started in December 2018, just a few days after Christmas. The S&P500 index recorded a low on December 27, 2018 when it was near 2395 points, and February's highs in 2020 were above 3395. The current hard tumble by 500 points (or, who knows, maybe more in the next few days?) is not quite a normal phenomenon after the 1000 points and 41.75% of continuous rise that lasted for 14 months with only three short breaks in May, August and October. Is the fastest "Mad Hatter" fall phase after the longest and the largest in scale "Mad Tea Party" climb finally coming to an end or does it just look as this is the case in the face of the combination of the market's cut of cards?


A "small" feature of the moment is only that the American and European stock markets headed for the worst week since the darkest days of the financial crisis in 2008. But the fundamental difference is that in 2020 we are not dealing with any systemic crisis yet. There are no clear signs of a noticeable slowdown in the economy of China or Europe at the moment, and it is widely expected that there would be just a temporary deviation in companies' revenues and profits if compared with the previously expected goals. That's not an apocalypse.


The final solution to this simple rebus is just a matter of time. A person who is not involved too much in these emotional backgrounds and who thinks logically could clearly see that no physical malicious virus is able to cause such a wide destruction of the world economy, or significantly undermine the power of the largest multinational companies. The main effect on the markets is produced now by the "viruses" of doubt and fear in the minds of many market participants who always "trade" according to their own expectations. The crowd is now driven by fear that holds them back from any new attempts of buying shares. Most investors are afraid of taking the assets at some temporarily bottom and then get the second and the third bottoms as "free bonus". But did all participants inadequately evaluate the shares of the largest companies before? And could the errors in assessing the real state of the companies be even much bigger than the current decline of 15% in the market capitalisation?


These are really good and correct questions. If the correct questions are asked, only then can the right answers be obtained. Quarter by quarter the giant companies that are within American or European jurisdictions have shown the fastest growth and a part of the expected future growth was also priced in. The majority of the markets expected the revenues to perform at the same high rate. Once these growth rates slowed down a little the price of shares immediately made a hard correction. But most of the positive expectations are still on the table, just postponed. That's the real reason behind the current severe price fall. But it should be remembered that the faster the market falls, the sooner a new wave of the rise can begin.


"China is still China, the economy is still the economy, the consumers are still consuming," Frank Lavin, CEO of Export Now, a digital solutions company, said to CNBC business TV channel. "Whatever the initial logic was that might have propelled you to go to the China market six months ago still holds today - even though we are the middle of some very bad weather," said Lavin, a former U.S. ambassador in Singapore under the George W. Bush administration. Although China's economy this year will be strongly hit by the ongoing health crisis, it will "still be a very nice year for the Chinese GDP," said Lavin. Lavin said he thinks there could still be a few more weeks of bad news after China "got off to a very bad start" handling the new coronavirus crisis. But Chinese authorities are "more or less getting their arms around it" now. "No company welcomes this kind of turmoil," Lavin said. "But most people (who) are looking at China, thinking about China are almost by definition, taking a long-term view," he added.


At the very end of the 2018 Christmas anti-rally, a lot of analysts were predicting a very bad next year for 2019, but it turned out to be a year of the largest growth in stock markets. In recent years there have been even more severe market declines given the scale of the drop in percentages and the length of time markets lost their capitalisation. The market correction itself now, of course, is big and tough, but it still looks like it is more technical and emotional. And... naturally, as it could be a normal component of the long-time market cycle.


Richard Myers wrote in his book The Basics of Chemistry that mercury was used in the manufacturing of felt hats during the 19th century causing a high rate of mercury poisoning among those working in the hat industry. Mercury poisoning causes neurological damage, including slurred speech, memory loss, and tremors, which led to the phrase "mad as a hatter". This is probably why Lewis Carroll used the character of the "Mad Hatter" in his novel Alice's Adventures in Wonderland. So, the market has been behaving like a Mad Hatter lately, but anyway a 'Frabjous day Would Come'. The Frabjous day is a day when Alice killed the Jabberwocky ("O frabjous day! Callooh! Callay!"), so the Frabjous day for the markets would mean a moment for a more clear view of everything that has happened. Maybe it will still be a little mad and always partly emotional, but on that day the mega rally may return to the markets. When will this Frabjous day come? Maybe today, or maybe over the course of the next weeks to come? Is the Mad phase of a heavy market panic close to its end? Only the market itself can provide the answer.


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