Markets Update: How COVID-19 Is and Isn’t Like the ’08 Financial Crisis
According to Ron William, market strategist and founder of RW Advisory, asset prices could be on the verge of a sharp collapse known as the “Minsky moment” and could retest the lows last seen in March..
The markets have seen a broad bullish period in recent months as investors have bet on further stimulus from governments and central banks and the prospect of a coronavirus vaccine. Despite the lingering global economic risks associated with the Covid-19 pandemic and geopolitical tensions, the S indices on Wednesday&P 500 and Nasdaq hit record highs and Dow Jones Industrial Average closed above 29,000 for the first time since February.
«Minsky moment», named after an economist Hayman Minsky, refers to the sudden collapse of the market after an erratic bullish move, which in this case could be due to the environment «affordable lending», created as a result of unprecedented fiscal and monetary policy measures.
Speaking Thursday on CNBC, Ron William identified a number of factors potentially contributing to this crash, the first of which was the narrow nature of recent market growth, with most of the positive price movement in the US being driven by tech giants.
«It’s an ongoing story of the divisions between tech street, Wall Street and Main Street, ”he said. – If we look at the equal weighted index S&P 500, it barely exceeds its June peak and has remained practically unchanged since then, so we can see there a divergence testing FAANG, as I call it».
U.S. tech giants known as FAANG (Facebook, Apple, Amazon, Netflix, Google) are central to the ongoing market recovery in the United States, even as the country continues to be ravaged by the coronavirus pandemic and widespread civil unrest..
William added that the broader Russell 2000 Small Capitalization Index, which includes a number of «zombie companies», was also below June peak on an equal weighted basis.
The UK’s FTSE 100 is still down more than 20% year-over-year, in stark contrast to US markets that surpassed pre-crisis peaks. For example, the index S&P 500 is up 10.8% YTD.
William also pointed to liquidity and volatility as historical indicators of a situation that may be around the corner..
«ETF (Exchange Traded Funds) flows on S&The P 500 hit a new all-time low. If we look at the VIX (Real-Time Market Volatility Expectations Index), it will also be in an interesting atypical spike as markets grow, suggesting a potential hedge against downside risk.», – noted is he.
Minsky’s moment mentioned by William could lead to a drop in assets by «20-30% or more», resulting in the current «V-shaped» recovery will lead to «sliding W-shaped testing of the March collapse low». March 23 S&P fell to 2237.4, this Wednesday it closed at 3,580.84.
Given the high estimates, negative seasonality in late August and early September, and the upcoming election cycle, William believes the market may be looking for pockets of correction. He added that this could be beneficial in the long run as it would lead to «many years of recovery before this long-term bull reappears».