Economy

How the New Worst Trading Days Since the 1987 Crash Stack Up, and How to Curb the Market Mayhem

What is unfolding in the wake of the coronavirus-induced economic panic is starting to feel like a runaway train. The reality is that the population seems to know that things are going to get worse in the number of cases and the number of deaths, and everyone is finding out just how economically sensitive their jobs and industries are when the entire economy is being ground down to a halt. And almost daily, the stock market seems to panic more than the prior day as the news gets worse and worse. There are some serious and bold ideas that can thwart more and more “worst days ever” (see below), but first things first — how these daily crashes are comparing to history in the financial markets.

As for the new bear market, what is unprecedented is just how fast the stock market correction has taken place. In the last week alone, the Dow Jones Industrial Average has seen two of the five worst trading days in modern history. Actually, make two of the last three trading alone.

The Dow was down 3,000 points right at the close of trading on Monday, March 16, 2020 and the index closed down 2,997 points at 20,188.52. That 12.9% drop in a single day overtook last Thursday’s drop of 9.99%.

The worst trading day in the Dow’s history was the 22.6% drop on the Black Monday stock market crash in October of 1987. The fourth-place and fifth-place single-day drops were tied to the October 28 (-12.8%) and October 29 (-11.7%) dates that kicked of the Crash of 1929, and improper regulatory and fiscal responses allowed what might have been a regular recession to escalate into the bowels of the Great Depression that did not end until World War II.

The S&P 500 closed down 11.98% on Monday, followed by a 12.32% drop in the NASDAQ.

What is so awful about the COVID-19 destruction, on top of the deaths and rising case numbers day by day, is the absolute financial destruction that is taking place. At the time this was being typed major store chains and restaurant chains and destinations were announcing that they were closing their doors for two weeks or until further notice.

Had the outbreak of COVID-19 turning into a pandemic taken place just two or three years ago it might not have come with so much stock market destruction. After all, the bull market recovery from the 2009 v-bottom continued in hyper-mode in recent years. The Dow went above 20,000 for the first time ever in late-January of 2017, and it was nearly at 30,000 barely three years later. Zoom backwards and forwards from just a month ago when the stock market was hitting all-time highs:

  • The DJIA at 20,188.52 is now down 31.7% from its February 12, 2020 high of 29,568.57.
  • The S&P 500 at 2,386.13 is now down 29.7% from its February 19, 2020 high of 3,393.52.
  • The NASDAQ at 6,904.59 is now down 29.8% from its February 19, 2020 high of 9,838.37.

With the date of Monday, March 16, 2020 being the latest blow, which was also given a panic selling mode in the last 30 minutes of the trading day after the White House’s new guidelines and suggestions were given, that’s just a mere 18 trading days that this went from a continuation of the raging bull market into a major bear market. And this bear market is rapidly turning into a recession, even if the classical economic definition of two consecutive quarters of negative GDP growth is somehow not met.

Another consideration about the new bear market is that it almost now feels that the Federal Reserve could have done nothing and said it wanted to withhold its tools in case this starts to get out of hand. The actions have effectively not prevented financial market panic, and some of the trading reactions feel as though the country is already overrun. With the number of businesses closing their doors, the employees that are being furloughed or being paid normally for the time being, it’s amazing that two emergency rate cuts taking the economy back down to a zero-percent interest rate policy, a $1.5 trillion bank liquidity injection to stabilize the bond market and a commitment to buy at least $500 billion in treasuries and at least another $200 billion in mortgage backed securities has in effect done zero for the financial markets. Now add in coordinated actions of other major central banks and an IMF $1 trillion pledge after more aggressive stimulus plans from Germany.

President Trump and Treasury Secretary Mnuchin have both indicated support for the airline sector, but this is going to have to extend to the hotel sector first and then is going to have to be reached out to the restaurant industry, the “other transportation” sector, cruises and theme parks. Dare we throw in movie theaters? Technically none of the businesses are national security risks on their own, but collectively they employ millions of Americans and if these business all implode then there are simply not going to be any jobs left for those millions of workers to fold back into. It’s an economic nightmare.

Now let’s consider the millions and millions of employees who work in retail or who are in catering or are tied to sports and venues in America. Again, individually there is nothing that would signal national security here on a standalone basis. Collectively letting all of these businesses fail will also leave the economy with no similar or in-kind job transfers available in related industries. Can waiters and waitresses, or servers, suddenly start working in giant infrastructure projects? Can all of the hospitality jobs in markets in Florida and California simply move immediately to where there might be new jobs elsewhere? That may happen individually, but a mass migration is not physically possible today when small obligations like home ownership, apartment leases and kids in schools are considered. There may be coming wave (or waves) of helicopter money for individuals.

And what about the army of mom and pop businesses that have 5, 10, 20 and 30 years of healthy and profitable businesses? Many of these businesses employ one to several employees. The Small Business Administration is offering working capital loans of up to $2 million to assist with a loss of revenue tied to coronavirus. There will probably be something more aggressive of some sort in this effort from the SBA. After all, the SBA indicates that there are currently over 30 million small businesses in America, with close to half of the domestic workforce either employed by a small business or that own a small business. Also noted by the SBA was that close to two out of three net new jobs are created by small businesses. Needless to say, those small businesses are also major tax payers at the federal, state and local levels of government.

As for market trading regulations, is it time to pull down the trading limit curbs that create halts in the stock market? As New York is a crowded and packed island, is it time to relocate primary trading functions? Would the exchange dare consider to lower the number of trading hours to three or four hours per day instead of six-and-a-half hours days now on a temporary basis? And to make matters even more complicated, would the NYSE dare to stop the financial bleeding by following a fresh announcement by the Philippine Stock Exchange that trading is suspended from March 17, 2020 until further notice due to enhanced quarantine measures taking place there?

There comes a point where intervention is needed on a massive scale, and there is only so much the Federal Reserve and other government agencies can do individually without getting rather creative and without challenging some of the existing laws or limitations of their current authority. If there are going to be efforts to stop or limit more instances of the “worst trading day(s) ever” there are going to have to be more aggressive measures taken using the history books of quantitative easing during and after the Great Recession of 2008 and 2009 that wiped out millions of jobs and ruined many lives.

A year-to-date chart of the Dow in 2020 has been provided from BigCharts.com below.