Over the past eleven years, the U.S. stock market has endured its longest and most prolific bull market in history. Largely funded by global central banks and their robust easing programs, the stock market has defied odds over the past decade. However, just as the bull market turned eleven, stock indices have extended losses past 20%, which marks bear market territory.
Driven by the coronavirus outbreak and the OPEC+ “oil war,” investors are increasingly wary on economic growth outlook and especially the health of the credit markets. This one-two punch has turned out to be a perfect storm for the markets, as the Trump Administration scrambles to develop fiscal stimulus plans and other methods to help curb the impact.
The flight to safety assets has been robust in recent months, as U.S. Treasuries now all yield below 1%, even the 30-year bond. With Treasury yields at all-time lows, the credit markets are flashing some strong warning signals about a potential recession in the future.
Oil Crushed, Long Term Treasuries Soar
Oil has seen a very volatile start to 2020. Just two days into 2020, oil prices were surging into the $60s, as markets were pricing in a potential U.S.-Iran war. However, since tensions have cooled between the two countries, oil prices have declined over 50% since January 2020 alone. As of this writing WTI crude oil is trading at $30 per barrel.
The fundamentals in the oil space are quite abysmal right now, as coronavirus limits demand and the OPEC+ “oil war’ threatens to drastically increase supply. Russia rejected the OPEC proposal to cut an additional 1.5 million barrels of oil per day. Thus, the current agreement will run out at the end of March and is currently not slated to be renewed. Saudi Arabia retaliated against Russia by lowering official oil prices and announcing plans to increase oil production.
One asset class that has fared very well during the market turmoil are long-term U.S. Treasuries. On a year-to-date basis, the 30-year Treasury is up 17%, the second-best performing future this year. The 10-year is up 7.85% YTD, 5-year note up 5.31%, and 2-year note is up 2.28%.
This has given ETFs like the iShares 20+ Year Treasury Bond ETF (ETF: TLT) a strong rally thus far. TLT is up 15.54% YTD and up nearly 28.50% over the past year. These Treasuries may not be providing much yield, but the price appreciation has been tremendous.
How Long Do Bear Markets Last?
Now that we have passed a correction and onto bear market territory, it is important to refresh on what exactly that means and how long it can last. A bear market is defined as a decline of 20% or greater from recent highs. Since 1940, bear markets have lasted an average of 13 months and see an average decline of 30.40% during that time. According to Goldman Sachs, it can take about 22 months for stocks to recover from a bear market.
On the bright side, many economists still do not estimate that the underlying fundamentals of the economy could result in a recession. For this reason, the bear market would not enter “full-fledged bear market” territory, if it can continue to avoid recession.
However, some economists are beginning to sound the alarm. Mohamed El-Erian, Chief Economic Advisor at Allianz, recently told CNBC that “We are going into a global recession. After what’s been happening the last few days, we are going to see a spread of economic sudden stops.”
Overall, the winds of change are whistling. After over a decade of bull markets, it was only a matter of time before we saw a meaningful correction or a mild bear market. Now it is up to Washington and the Federal Reserve to enact necessary stimulus and support to the economy, while it works through coronavirus and oil wars.