crisis roadmap: 200 year review of major markets · by eden rahim, portfolio manager & options...

Crisis Roadmap: 200 Year Review of Major Markets

In light of the extraordinary economic and market developments that have necessitated policymakers to induce a coma on all social and business activity, in this piece we seek to provide our investors with a roadmap focussed on how this selloff compares to every similar panic over the past 200 years, and most importantly, how the market has played out over the year following. We draw on our extensive database of historic documents and data with the hope that it helps you to provide some perspective to your clients.

One thing that is certain is that policymakers, in calling audibles at the line of scrimmage, are reacting rapidly to changing conditions, and clearly are cognizant of the policy errors of 1929 and 2008, in anticipating the collateral damage that occurs by not acting fast enough or with targeted effectiveness.

Data: Schwert TR Stock Indexes University of Rochester as of March 2020, Concept: Next Edge Capital Corp.

MOODYS BAA - 10 YR SPREAD VS OEX-VIX1986 - 2020

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0

10

20

30

40

50

60

70

80

90

100

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

MO

ODY

S Ba

a -1

0 YR

RIS

K SP

READ

%

OLD

VIX

-S&

P 10

0 O

EX

VXO (OEX S&P 100 IV) Moodys Baa - 10 Yr Yield Spread

1987CRASH

TECH BUBBLEBURST / 9-11

FINANCIALCRISIS

COVID-19

@edenrahim

MEASURES OF MARKET STRESS

Index implied volatility has matched the extraordinary watershed event, the 1987 market crash. Juxtaposed with Moody’s Baa Corporate spread to 10-Yr Treasuries at 4.2%, that spread has eclipsed the LTCM debacle in 1998, the Tech wreck in 2002, and the Moody’s downgrade in 2011, all of which peaked around 350 bps. At the nadir of the financial crisis amidst widespread failures of financial behemoths, that spread rose to 600 bps.

by Eden Rahim, Portfolio Manager & Options Strategist, Next Edge Bio-Tech Plus Fund

CRISIS ROADMAP as of March 23, 2020

We are routinely experiencing daily + or – 5% market moves for the past month. Accordingly, we checked back to 1896 for when we have experienced similar manic episodes. We are in rarefied air indeed. We eclipsed the readings at the lows in 1987 and 2008, exceeded the reading at the depth of the depression in July 1932. Only the low at the 1929 Crash on November 13th slightly exceeded the current reading near 5%.


AVERAGE ABSOLUTE DAILY PERCENT % MOVE - 21 DAY AVERAGEDOW INDUSTRIALS 1896 - 2020

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1896

-06-

2418

99-0

3-22

1901

-12-

3019

04-0

9-26

1907

-06-

2519

10-0

3-18

1912

-12-

1819

16-0

1-28

1918

-11-

0619

21-0

8-10

1924

-05-

2019

27-0

2-16

1929

-11-

2019

32-0

8-22

1935

-06-

1019

38-0

3-09

1940

-12-

1119

43-0

9-14

1946

-06-

2119

49-0

3-24

1951

-12-

3119

54-0

9-30

1957

-06-

2719

60-0

3-23

1962

-12-

1919

65-0

9-16

1968

-06-

1719

71-0

4-19

1974

-01-

1119

76-1

0-04

1979

-06-

2819

82-0

3-23

1984

-12-

1119

87-0

9-04

1990

-05-

3019

93-0

2-19

1995

-11-

0819

98-0

7-13

2001

-03-

1620

03-1

2-08

2006

-09-

0520

09-0

6-04

2012

-02-

2420

14-1

1-20

2017

-08-

18

21-D

AY A

VERA

GE

OF

DAI

LY P

ERCE

NT

MO

VE

AVERAGE ABSOLUTE DAILY PERCENT % MOVE - 21 Day AverageDow Industrials 1896 - 2020

@edenrahim

BLEAKEST SENTIMENT - A CONTRARIAN’S DREAM

One of the most reliable indicators anywhere, the 10-day ratio of Equity Puts traded versus Calls traded, show that bearish bets are locked and loaded, at a level we have only ever seen at the depth of the financial crisis. A quantitative measure of just how stretched the elastic band is.

Data: Stockcharts.com as of March 2020

A TRIP ACROSS THE BIG MARKETS

Just maybe, the 40-year bull market in Treasury bonds has seen its best days, at a time that equities are at their best valuation in many years, registering off-the-charts oversold readings as it discounts the apocalypse. One thing is certain, that there will be an avalanche of supply hitting the market over the next few years to fund the extraordinary bridging measures being taken. And when the fear trade abates, yields are unlikely to sustain below 1%.


US 10-YEAR TREASURY YIELD 1800 - 2020

After lengthy secular bear markets in the 1930s, 1970s, and 2000s, the market broke out and would undulate upward for 15 to 20 years, punctuated by bear markets, panics, and crashes every few years. In 2013, the market broke through S&P500 1550 level that had capped it for 13 years. Since then, the market has exhaled three times: in 2016, 2018, and now again in 2020. After a period of damage repair, history suggests that equities will regroup for another advance higher, with new leadership in anticipation of profit growth, surfing a tidal wave of liquidity.

Data: Bloomberg Data as of March 2020, Concept: Next Edge Capital Corp.

S&P 1927 - 2020 (WEEKLY)

4

8

16

32

64

128

256

512

1024

2048

2728293031323334353637383940414243434445464748495051525354555657585959606162636465666768697071727374747576777879808182838485868788898990919293949596979899000102030405050607080910111213141516171819202021

S&P 1927 - 2020 (Weekly)

@EdenRahim

200 YEAR PANORAMA OF EVERY -30% BEAR MARKET, PANIC OR CLIMACTIC MELTDOWN & 1 YEAR RECOVERY

The largest and most important commodity in the world has broken down through its 50-year uptrend and 40-year support in the low $30s in response to collapsing demand plus cartel wars. Forty-five year support is at $10-$12. However, any combination of rig count attrition, demand bounce, and Saudi-Russian truce could provide support.

Data: Bloomberg Data as of March 2020, Concept: Next Edge Capital Corp.

SPOT CRUDE OIL 1970 - 2020

$2

$4

$8

$16

$32

$64

$128

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

SPOT CRUDE OIL 1970 - 2020

Data: William Schwert TR Indexes, University of Rochester, Bloomberg Data, Concept: Next Edge Capital Corp.

CRISIS/PANIC

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%Mar-57 Apr-57 May-57 Jun-57 Jul-57 Aug-57 Sep-57 Oct-57

PANIC OF 1857 -45%Mar - Oct 1857

Schwerts TR Stock Index S&P 2020 Covid19 Panic

1 YEAR FOLLOWING

50556065707580859095

OCT 1857 - OCT 1858 +45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%Jun-76 Aug-76 Oct-76 Dec-76 Feb-77 Apr-77 Jun-77

RAILROAD PANIC OF 1877 -30%Jun 1876 - Jun 1877

Schwert TR Stock Index S&P 500 Covid19 Panic

350

370

390

410

430

450

470

490

JUN 1877 - JUN 1878 +35%


CRISIS/PANIC

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%1-Jan-93 1-Feb-93 1-Mar-93 1-Apr-93 1-May-93 1-Jun-93 1-Jul-93

DEPRESSION OF 1893 -34% PANIC Jan - Jul 1893

Schwert TR Index S&P Covid19 2020 Panic

DEPRESSION OF 1893 -34% PANIC PHASE

1 YEAR FOLLOWING

1000

1050

1100

1150

1200

1250

1300

1350

JUL 1893 - JUL 1894 +20%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%4-May-03 4-Jun-03 4-Jul-03 4-Aug-03 4-Sep-03 4-Oct-03

RICH MAN'S PANIC OF 1903 -35%May - Oct 1903

Dow Jones Industrial Avg (DJI) S&P 2020 Covid19 Panic40

45

50

55

60

65

15-Oct-03 15-Dec-03 15-Feb-04 15-Apr-04 15-Jun-04 15-Aug-04 15-Oct-04

OCT 1903 - OCT 1904 +47%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07

BANK PANIC OF 1907 -45%Jan - Nov 1907

DJI S&P 2020 Covid19 Panic50

55

60

65

70

75

80

85

90

1907-11-15 1908-02-13 1908-05-13 1908-08-11 1908-11-09

NOV 1907 - NOV 1908 +66%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%8-Jul-14 12-Jul-14 16-Jul-14 20-Jul-14 24-Jul-14 28-Jul-14 1-Aug-14 5-Aug-14

WW1 -35% TRADING HALTED 6 July - Aug 1914

DJI S&P Covid19 2020

WW1 -35% TRADING HALTED 6 MONTHS

50

55

60

65

70

75

80

1914-12-14 1915-02-12 1915-04-13 1915-06-12

WW1 - 1 YEAR POST HALT +35%


CRISIS/PANIC

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%3-Sep-29 14-Sep-29 25-Sep-29 6-Oct-29 17-Oct-29 28-Oct-29 8-Nov-29

CRASH OF 1929 -48% OVER 10 WEEKSSept - Nov 1929

DJI S&P 500 Covid 2020 Panic

1 YEAR FOLLOWING

150

170

190

210

230

250

270

290

1929-11-13 1930-01-22 1930-04-02 1930-06-11 1930-08-20 1930-10-29

SMOOT HAWLEY SET RECOVERY ON PATH TO DEPRESSION -18%

1930 FED HIKES & SMOOT HAWLEY SET RECOVERY ON PATH TO DEPRESSION -18%

-55%

-45%

-35%

-25%

-15%

-5%9-Mar-32 29-Mar-32 18-Apr-32 8-May-32 28-May-32 17-Jun-32 7-Jul-32

CLIMACTIC 1932 CRASH TO Mar - July 1932

DJI S&P Covid19 2020 Panic

CLIMACTIC 1932 CRASH TO DEPRESSION LOW -53%

40

50

60

70

80

90

100

110

1932-07-08 1932-09-08 1932-11-08 1933-01-08 1933-03-08 1933-05-08

1-YR POST DEPRESSION LOW +156%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%1938-02-23 1938-03-02 1938-03-09 1938-03-16 1938-03-23 1938-03-30

CLIMACTIC MELTDOWN TO 1938 LOW -25%

Feb - Mar 1938


105

115

125

135

145

155

165

1938-03-31 1938-06-30 1938-09-30 1938-12-31 1939-03-31

MAR 1938 - MAR 1939 +33%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%24-Apr-62 9-May-62 24-May-62 8-Jun-62 23-Jun-62

KENNEDY-US STEEL PANIC 1962 -25%Mar - Jun 1962

DJI S&P Covid19 2020 Panic525

575

625

675

725

1962-06-26 1962-09-26 1962-12-26 1963-03-26 1963-06-26

CUBAN MISSILE CRISIS BULL YEAR +32%JUN 1962 - JUN 1963


CRISIS/PANIC

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10-Nov-69 10-Dec-69 10-Jan-70 10-Feb-70 10-Mar-70 10-Apr-70 10-May-70

MELTDOWN LOW OF 1969-70 -35%Nov 1969 - May 1970


MELTDOWN LOW OF 1969-70 -35% BEAR - 25%

1 YEAR FOLLOWING

600

650

700

750

800

850

900

950

1970-05-26 1970-08-26 1970-11-26 1971-02-26 1971-05-26

1 YEAR AFTER MAY 1970 LOW +44%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%8-Aug-74 18-Aug-74 28-Aug-74 7-Sep-74 17-Sep-74 27-Sep-74

CLIMACTIC MELTDOWN INTO 73-25%Aug - Oct 1974


CLIMACTIC MELTDOWN INTO 73-74 BEAR LOW -25%

550

600

650

700

750

800

850

900

1974-10-04 1974-12-04 1975-02-04 1975-04-04 1975-06-04 1975-08-04

OCT 1974 - OCT 1975 +39%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%25-Aug-87 4-Sep-87 14-Sep-87 24-Sep-87 4-Oct-87 14-Oct-87

1987 CRASH -36%Aug - Oct 1987


1750

1800

1850

1900

1950

2000

2050

2100

2150

2200

1987-10-19 1988-01-19 1988-04-19 1988-07-19 1988-10-19

POST-1987 CRASH YEAR +23%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%2001-08-24 2001-08-31 2001-09-07 2001-09-14 2001-09-21 2001-09-28

DECLINE INTO & AFTER 9/11 -21%Aug - Sep 2001


8000

8500

9000

9500

10000

10500

11000

2001-09-21 2001-11-21 2002-01-21 2002-03-21 2002-05-21 2002-07-21

1 YEAR POST 9/11 LOW -3%


CRISIS/PANIC

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%12-Sep-08 22-Sep-08 2-Oct-08 12-Oct-08 22-Oct-08 1-Nov-08 11-Nov-08

CRASH PHASE OF 2007-09 CRISIS -40%Sep - Nov 2008


1 YEAR FOLLOWING

6000

6500

7000

7500

8000

8500

9000

9500

10000

10500

11000

2008-11-20 2009-02-20 2009-05-20 2009-08-20 2009-11-20

1 YR POST CRISIS CRASH LOW +37%

TECHNICAL SET UP OF BIOTECH IS THAT OF AN EMERGING BULL MARKET

While almost every sector makes multiyear lows, the undervalued and out-of-favour biotech sector is making higher lows as the large-caps flex their defensive qualities, much as they did during the financial crisis. While the midcaps we focus on for insulated future growth were hit as hard as any other sector, we believe this to be transient as they are much less economically sensitive than virtually any other sector of companies out there. Furthermore, despite the economic downturn, biotech focusses on treating chronic and often fatal illnesses and non-discretionary as such. You avoid treatment, you put your life at risk. Curiously, the percent of +200 companies in the Nasdaq Biotech Index (^NBI) trading above their 200-day moving average is making higher lows at 13% despite spiking below the Q4 18 lows. Over the past 20 years, it is rare for this barometer to decline to 10% or below. When it does, it has always proven to be a low-risk entry point. With biotech range-bound for five years, and showing relative strength during this decline, the sector appears to be setting up to assume a leadership role in the new market cycle.

Source: Bloomberg Data as of March 23, 2020, Concept: Next Edge Capital Corp.

NASDAQ BIOTECH INDEX 2002 - 2020 VSPERCENT OF BIOTECH STOCKS ABOVE THEIR 200 DAY MOVING AVERAGE

0

10

20

30

40

50

60

70

80

90

100

400

800

1600

3200

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

PERC

ENT

OF

BIO

TECH

STO

CKS A

BOVE

200

DM

A

NAS

DAQ

BIO

TECH

IND

EX (^

NBI

)

NASDAQ BIOTECH INDEX 2002 - 2020 vsPERCENT OF BIOTECH STOCKS ABOVE THEIR 200 DAY MOVING AVERAGE

Nasdaq Biotech Index (^NBI) Percent of +200 NBI companies above 200 day moving average

7 YEARS 7 YEARS 4 YEARS

1 Toronto St, Suite 200, Toronto, ON M5C 2V6CLIENT SERVICES 1.844.656.2321

[email protected] 1.877.860.1080 T +1.416.775.3600

nextedgecapital.com

Follow us:

For Existing Investors and Investment Professional Use Only. Please see accompanying important disclosures.

IMPORTANT NOTES Opinions expressed are those of the author as of the date of their publication, are subject to change and may not reflect the opinion of all members of the Company. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be “forward-looking statements” and are based on current indicators and expectations at the date of their publication. We undertake no obligation to update or revise them. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those implied in the statements.

crisis roadmap: 200 year review of major markets · by eden rahim, portfolio manager & options...

Documents