A "flash" bear market

Source: Wall Street Journal

Nasdaq up 30% since January

What happened in 2008-10?

• At its bottom, S&P 500 was       55% from previous high.
• Slow recovery: 5 years to get back at Jan. 2008 levels.

A tale of two crises

The Global Financial Crisis of 2008-2010

• Originates in financial sector        spillover to real economy.
• Fundamentally, a problem of systemic over-leveraging:
  • households borrowing above their means (NINJA loans)
  • banks funding switched from long-term deposits to fragile short-term overnight loans ("Repo")
• Also, under-regulation:
  • regulators underestimated systemic risk and how inter-connected the modern financial system is.

A tale of two crises

The pandemic crisis of 2020-?

• Fundamentally, a real economy shock.
• Economic activity is disrupted:
  • massive unemployment
  • frozen economic sectors (think of airlines, hotels, AirBnB)
  • economic opportunities for tech-savvy companies that can scale. 

Spillover to financial sector? Looks like it!

Source: NYU V-Lab

Systemic risk at its

highest since GFC

Crisis probability at its highest since GFC

Spillover to financial sector? Looks like it!

Same picture for 🇨🇦:

1. Non-performing loans
2. Loan payment deferments
3. Cheap government money

Quantitative Easing on steroids

U.S. Federal Reserve established two corporate credit facilities:

1. May lend directly to corporations (Primary Market)
2. May buy corporate bonds & bond ETFs (Secondary Market)

• The Fed also relaxed regulatory requirements for banks
• ... and dropped the reference rate from 1.75% to 0.25%

Do we read too much into the market recovery?

          Somebody seems to!

What is the market?

The Great Disconnect

Top 5 companies (Apple, Amazon, Microsoft, Alphabet and Facebook) make up for 23% of the S&P 500.

58%

75%

26 %

10%

34%

"The stock market is comprised of the biggest and strongest companies. It is not representative of the entire economy. If there were a stock market index of private, small businesses, it would likely be down 50% or more."  

-- William Ackman , founder of Pershing Square Capital Management LP

• Growth stocks (high P/E) react less to business cycles.
• Value stocks (low P/E) are more sensitive to overall economy.
• HML underperformance: Investors seem to be less confident in a fast recovery.

Source: Bank of Canada

What do markets really think of the economy?

Just looking at the index doesn't cut it anymore

Who is the market?

(and the brave post-pandemic world)

The Wild West of Retail Trading

Discount brokerages now offer fractional shares: own $0.01-worth of Amazon, or 0.000003 shares.

No trading commissions! 😊

Wait...how do brokers make money?

Discount brokers sell retail order flow to wholesale market-makers like Citadel.

(PFOF)

Going too far?

The curious case of the Hertz bankruptcy 

Car rental business Hertz filed for bankruptcy in May, 2020

SEC eventually blocked the deal:

Then, something wild happened:

#WFH financial market? 

(totally feasible!*)

* with some caveats!

Trading hubs make surveillance easier!

The human touch: NYSE and corporate success

Need for space: One market did not slow down

Source: TRREB September 2020 Statistics

#WFH