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Covid-19 hasn’t just triggered a global health pandemic. Though it began as a health crisis, it has soon evolved into a financial mayhem, which has upended entire industries, forced businesses to down their shutters and lay off workers or ask them not to come to work. As a result, financial markets all over the world are reeling from the effect and the US isn’t an exception.

We already know about the grim situation and how things are getting worse as recent data and news are indicating. The biggest question on almost everyone’s mind is – how long will this financial crisis continue and how fast (or slowly) would the global markets recover once the pandemic has been controlled.

The next two weeks will be tough

Taking a cue from the progress curve of COVID-19 in Italy, it can be assumed that by the next 2 weeks (i.e. around mid-April), the US will start experiencing a reduced growth rate in new cases. However, the markets would still be under a lot of stress, primarily because of three key factors.

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To begin with, the markets have been badly affected by the massive deleveraging by hedge funds and other top players. Due to the Russian-Saudi price war, a collapse in oil prices is another factor that has made matters exponentially worse. A soaring dollar is the third factor. Due to the steadily rising real rates along with excessive demand for dollars, supply has dried up. This has triggered a lack of liquidity, which in turn, has thrown the markets into the panic mode. To get the markets to return to their calm mode, the real rates should drop, the dollar should grow weaker, and the credit spreads should become stable. It’s expected that these could happen in a week or two.

Stock market volatility

The CBOE Volatility Index, or VIX, is a real-time market index that’s computed based on option prices, unlike the S&P 500 or the DJIA (Dow Jones Industrial Average) that are calculated based on stock prices. Thus, the VIX represents the market’s expectations for volatility. You should remember that VIX gives you a measure of volatility, and it isn’t merely an inverse market index. This means that both crashing down and crashing up of markets will send the VIX higher. Since in the short-term, the market’s realized volatility (i.e. its absolute changes) and its level are inversely correlated, big declines push the VIX higher while crushing rallies drive it to plunging depths. Last week, on four of five days, the S&P 500 moved at least 2.9% though it gained more than 10% on the week. Since the realized volatility was still high, options markets that the VIX measures are implying high volatility. As VIX remained persistently elevated together with stock implied correlations, those who concluded March 23 to be the ultimate bottom for the markets need to think again. Experts predict that the bear-market rout prompted by the COVID-19 pandemic won’t bottom until the VIX comes down.

Last week, even an evaluation of market-breadth (which stands for measuring the number of stocks going up vs. the ones going down) in the S&P 500 demonstrated the new highs minus the new lows (−80%) was the third lowest in history, after 2008 during the Great Financial Crisis (−82%) and the 1930s (which includes periods of the stock market crash and Great Depression from 1929 to 1932 and the recession of 1937–1938).

What to expect in the coming days?

Unlike in 2008 when the government was slow to respond (as it had to come up with the programs then for the first time, which it can re-deploy in the present scenario much faster), the present scenario has seen significant stimulus coming from the Federal Reserve and the Congress. As $4 trillion of helicopter money is poised to give massive support to the US economy, it’s unlikely that another Great Depression would set in. Though the market lows aren’t yet over, the majority of the declines seem to have occurred already.

According to health and financial experts, we’re at least several weeks away (most likely) from the peak rate of change in either coronavirus cases or the resultant economic crisis. However, the good news is that the market has moved pretty rapidly to discount this shock. Though the forthcoming weeks may still make the markets experience some more lows, the momentum of the decline is, in all probability, peaking. And with the trillion-dollar aid package coming soon, you can expect to see a potentially large re-balancing over the next few weeks.

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Tax Strategies for Incorporated Professionals.

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