Market conditions in March 2020

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.
Image result for corporate debt as percentage of gdp
Image result for corporate debt 2020

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.

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