Markets are usually driven by greed or fear. On mercifully rare occasions, they are driven by outright panic. Monday’s price movements as Asian markets opened were one such occasion.
The 30-year U.S. Treasury yield fell by around 0.4 percentage points as markets opened, which would be its third-largest single-day move in 35 years, surpassing the 0.35 point drop on Friday. The two days with larger declines were Oct. 20, 1987, the day after the Black Monday crash, and Nov. 20 2008, during one of the worst weeks in U.S. financial market history.
The latest move may be larger than is merited even by the seriousness of the weekend’s news. A disagreement between Saudi Arabia and Russia over oil output drove a fall in oil prices by as much as 30%, and travel restrictions placed on 17 million people in Italy came into effect to control the spread of the coronavirus.
But that no longer matters in the short term. When panic rules the roost, markets can be governed more by the perceived health of the institutions operating in them than by a rational understanding of economic developments. In such circumstances, margin calls can spark selloffs even in assets generally judged to be safe—gold is a recent case in point—and the prices of risk assets can fall far further than coolheaded assessments of their fundamental value would suggest.
Given that, investors should think twice before attempting to time markets or find bargains right now. Some may think Treasurys cannot move further after such large moves already, but the safest government bonds have been the only consistent source of insurance against the current selloff, and will likely continue to offer protection if things get worse.
So far, outright blowups of heavily leveraged funds and financial products have been notably absent from the last two weeks of market volatility. Moves of the scale seen as markets opened Monday could change that.
Investors have some reasons to temper their fears, if not to turn optimistic. The world’s major banking institutions are far better able to weather shocks than they were in 2008, and the underlying plumbing that keeps markets moving has yet to show the signs of seizure that characterized the global financial crisis. Large banks are less than half as heavily leveraged as they were in 2008, according to the Financial Stability Board.
After Black Monday, it took the Dow Jones Industrial Average a little over 18 months to hit fresh highs. In contrast, the same index didn’t climb back to its 2007 peak until 2013.
The current crisis is still evolving, but the relative strength of the world’s major banks could end up making this selloff look more like Black Monday than the global financial crisis. The defining quality of the latter was the total arrest of the banking system. Better defenses against a similar outcome today should assuage some of the worst fears in markets right now.
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