Wall Street’s Believe It or Not

Rick Rieder, Russ Brownback and Trevor Slaven contend that even as markets are gripped with the trauma of wild swings, and continued uncertainties, the seeds of future investment opportunity are being sown.

Ripley’s Believe It or Not! is an American franchise, founded by Robert Ripley, which deals in bizarre events and items so strange and unusual that readers might question the claims. Originally a newspaper panel, the Believe It or Not feature proved popular and was later adapted into a wide variety of formats, including radio, television, comic books, a chain of museums, and a book series. In our April 2 call with clients, we laid out an argument that contended that in March 2020 global investors experienced their own “believe it or not” moments, as a global pandemic of historic proportions led to cross-asset price action that was so drastic and volatile, it was truly hard to comprehend. We share those arguments below.

Market moves that were hard to comprehend

Indeed, the market moves last month were unlike any we have seen in our careers with many assets experiencing more year-to-date price volatility than what was realized over the entire previous decade. In early March, it became suddenly obvious that the COVID-19 crisis was going to morph into a contagious whole-asset stack shock, and very quickly thereafter virtually all global markets froze. Global risk assets were forced to be marked down to the price at which they could be indiscriminately liquidated. For assets that couldn’t find a clearing price, it was nearly impossible to discern their “actual value.” To wit, AAA rated assets were marked down by 10 or 20 points, in some cases. The fear was even more palpable in the markets for implied volatility where the cost of options approached the ten-year 100th percentile in nearly every asset class where options markets exist, while the CBOE’s VIX index hit an all-time high.

In the U.S., equities witnessed their third worst month in modern history, while U.S. high yield bond yields doubled in a two-week interval. Astoundingly, even the “risk-free” U.S. Treasury market was upset. While benchmark Treasury issues were sprinting toward the zero-lower bound, off-the-run Treasury issues couldn’t find clearing levels in the secondary markets, as there was simply no spare systemic balance sheet capacity. Global investors began hoarding cash in record-setting amounts, with money market funds receiving $500 billion of capital inflows over a four-week span. To be sure, the entire financial economy has been inundated with a true 100-year storm.

This financial panic reflected the unfolding left-tail scenario for the global economy that appears to be an unprecedented halt on a great deal of economic activity. We expect the real-time indicators to translate into stunningly poor (albeit lagged) economic data points in the coming weeks (see graph). Only a month removed from the end of a long and persistent string of full-employment readings, we suddenly face the highest jobless claims numbers in history. Moreover, the U.S. unemployment rate might exceed the 2008 high, and GDP will likely contract roughly 5% this year, the worst growth since the Great Depression. Fortunately, there is sufficient reason to view this growth shock as temporary.