Dow Officially Enters Bear Market

Chris Gaetano
Published Date:
Mar 12, 2020
The Dow Jones Industrial Average is now in full bear market territory, as the coronavirus epidemic ravages the global economy, thus ending the longest-running bull market in history, according to the Wall Street Journal.

While, generally, a bull market is considered "when stocks are going up" and a bear market is "when stocks are going down," technically, both are marked by 20 percent increases or decreases from previous highs or lows. In this case, stocks have fallen 20 percent from its record of 29,551.42 on Feb. 12. It seems to be getting worse too: As of 12:16 p.m. on Thursday, the Dow has lost a further 2,223 points. 

Markets were panicked by a combination of the coronavirus outbreak being officially declared a pandemic by the World Health Organization and the president's recent speech, when he declared new travel restrictions, which could disrupt business operations. Investors were also distressed that the speech did not contain details of major economic stimulus measures to blunt the virus's impact, and indeed some felt it showed a lack of ambition. The S&P 500 was down by 0.8 percent when he began the speech, and 2 percent when he ended it, and then it continued to fall. 

Another worry sign is that large corporations are beginning to max out on lines of credit that were meant to be tapped a bit at a time, according to Bloomberg. Boeing drew down its entire $13.8 billion line of credit, and while Wynn Resorts and Hilton did not completely exhaust their credit, they are reported to have drawn down a significant amount. These firms are on the front lines of industries highly impacted by the virus,—airplanes and hotels—but private equity firms Blackstone and Carlyle Group have encouraged other companies to take similar action. Corporations, it seems, are more uncertain as to whether they'll have enough cash on hand to stay alive, and firms have turned to bank loans. Anticipating this, Bloomberg speculated that banks might respond by hoarding cash over concerns there might be more companies looking for loans. 

Typically, when a firm seeks liquidity, it turns to the bond market, but this arena has become much less forgiving than it has in the past. Barron's said that corporate debt on Monday had its worst day since 2008, driven by a mass sell-off of BBB-rated bonds, close to the lowest possible grade a bond can receive before being considered junk. This low-quality debt makes up about half of the entire corporate debt market, a product of central bank policies around the world sustaining historically low interest rates for historically long periods. The New York Times is reporting that the mass offloading of risky debt in favor of safer Treasury Bonds has placed stress on companies that had previously been able to survive by continually issuing debt. With fewer looking to buy their bonds, this credit tap is slowing, which could force these companies to severely cut costs to compensate, or even shut down entirely.

This is happening at the same time that credit rating agencies, starting to see the writing on the wall, have begun accelerating credit downgrades and credit-watch alerts, according to Moody’s said on Wednesday that it had raised its baseline corporate bond default rate projection for year-end 2020 to 3.6 percent from 3.4 percent and, depending on how bad things get, the default rate could even reach up to 9.7 percent. In one of its own reports, S&P Global said that corporate bond issuance in general has dried to near nothing, and that there has been no speculative-grade, or junk, bond issuance globally since a $450 million issue on Feb. 21. 

Even Treasury bonds, considered one of the safest possible investments one could ever make, are suddenly in flux, as investors seeking out this safe haven has spiked demand to the point where it may eventually outstrip supply. 

With all this in mind, economists are increasingly worried about a recession. Bloomberg's analysis puts the chances now at at 53 percent, while a Wall Street Journal poll of economists place the probability at 49 percent, so essentially a coin toss. Others were more pessimistic: Larry Summers, former economic adviser in the Obama administration, pegs the probability at 80 percent while Former Fed Vice Chairman Alan Binder called it at 90 percent but said we might already be in one and just don't know it yet. 

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