I was playing around with some data to inform my intuitions about this 2020 market correction and to make sure I position Electric Capital for success in the coming years.
None of this is investment advice. I am sharing thoughts in case the data is useful to other founders thinking about the state of the markets today.
S&P 500 Data
Observations on the S&P 500
- 2020 is a much faster decline than prior corrections.
- If we are lucky and COVID-19 concerns are overblown, we may end up most similar to the 2018 pull back. Even so, we still have 5 months to go to get back to all time highs in the stock market and for people to feel the good times are back.
- If this is a broader correction like 1987, 2000, or 2008, we likely have at least 16 months to go.
- If this is a bigger correction, we likely fall more from the current -20% as of March 13, 2020.
- Each major correction since 1987 has been a more steep fall than the last
- Broader corrections have a cascading set of secondary effects which manifest as periods of calm followed by significant subsequent drops.
Why are so many people worried?
I am not an economist or macro fund manager. And this is not investment advice. I deeply understand early stage startups and cryptocurrencies, and not much else 🙂
The following is a collection of data I have heard referenced in various contexts. I am compiling it for reference.
- Personal debt is at all time highs in both nominal terms and as percent of GDP.
- Corporate debt is at all time highs in both nominal terms and as a percent of GDP.
- 40% of corporate debt are below investment grade and much of it may slip below investment grade if there is a pull back in the broader economy.
- Interest rates are near all time lows with not much room to move lower to stimulate the economy.
- Money printing has ramped back up out of necessity and we will soon be at all time highs in terms of total assets on the Fed’s balance sheet.
- The crisis here is likely a demand shock from consumers not traveling or eating out, with the first businesses hurt being small businesses.
In addition, we live in a far more connected world than we did in 1987, 2000, or even 2008. There are significant disruptions in sectors such as travel, hospitality, and supply chains in a way we have never before experienced (because the world was never this connected). We have yet to see how/if this cascades to other sectors.
Unlike 2008 or 2001, this is a demand crisis as people stay home, not a liquidity crisis (yet). This will likely impact small businesses and the service sector up front, not cash-rich large businesses. It is not clear to me that Western governments know how to handle a demand crisis that cascades out from Main Street rather than Wall Street this time.
In every graph I can find, we are in a more leveraged state than 2001 or 2008 and have less monetary margin for error. This does not inspire a great amount of confidence that the foundations of our financial and monetary system are strong and can weather a significant systemic shock.
What happens next
No one knows what is going to happen and I am not in the business of making public economic predictions. For all I know, COVID-19 blows over, the debt bubbles keep going, the Fed’s balance sheet keeps growing, and the economy keeps going for the next decade.
However, I do believe that we have not yet seen the peak load on the American healthcare system, and what happens with COVID-19 in the US will have a tremendous impact on how significant and how prolonged any global economic impact will be. The number of deaths will also be a significant driver of American sentiment which will cascade in to 2020 elections.
For everyone’s sake, I hope the impact is minimal and mortality rates very low. Unfortunately I suspect and fear they will not be.