One theory states that in Wuhan, Hubei province, China, a case of pneumonia was caused by a novel coronavirus in December 2019. Bats are thought to be regular reservoirs for SARS-CoV-2, but it is unlikely the virus was transmitted directly to humans. It is more likely that there was an intermediate host such as snakes or Malayan pangolins. A pangolin is a scaly, otherwise harmless animal that eats ants. The transmission of the virus from an animal to the human host likely occurred at a live animal market, Hunan Seafood Wholesale Market. At these “wet markets” animals, some exotic, are butchered in a booth adjacent to a booth that might be selling produce. Another theory is that the virus escaped a laboratory in that same province. A third theory is that it originated in a different province. From early March 2020 to early April cases of COVID-19 raced to over a million worldwide, with over 300,000 in the United States. However or wherever it originated, it killed the great bull market.

Stock Market Crash

From the all-time high February 19, 2020, the stock market crashed. In speed and depth, the drop in the market was very similar to the three previous crashes: Octobers of 1929, 1987, and 2008. One difference is that with the previous three, the market was already dropping mildly, then crashed. This time it crashed from an all-time high in just twenty-three trading days. Although those previous crashes included, and gained notoriety from, one or two severe days, they actually unfolded over a few weeks, just like the one in March 2020.

The crash that ended the great bull market had three phases. The first phase, from February 19 to February 28, 2020, was a sharp seven-day drop when investors realized just how contagious the coronavirus was and that it would spread to Europe and the United States. Over these seven trading days, the S&P 1500 Index dropped 12.8%. At the time it resembled the sharp drop of 11.8%, September 17–September 21, 2001, when stock trading resumed a week after the terrorist attacks of September 11, 2001. But unlike 2001, which did not develop into a crash, there was phase two in 2020.

Phase two was ignited in the oil market. Virus containment measures slowed economies in China and other Asian countries, which put downward pressure on the price of oil. At an OPEC+ meeting, Saudi Arabia proposed output reduction to support the price of oil, but Russia refused to go along. Saudi Arabia retaliated by increasing its production, which drove the price of oil even lower. From March 3, 2020, through March 12, 2020, the price per barrel of Brent crude oil dropped 36% while the S&P 1500 Index lost 17.8% over the same period. Investors reasoned that with the price of oil so low there would be energy-related unemployment, defaults, bankruptcies, and earnings problems. During that drop, bankruptcy and default fears can easily be seen in the bond market as corporate credit spreads increased dramatically. Even high-grade bonds took a hit and were not their usual safe hiding place. Moody's AAA bond yield, which is the highest corporate rating, shot up from 2.36% to 4.12% (a 75% increase) in nine trading days. Potential default fears caused a liquidity crisis, a setting of all sellers and no buyers in all qualities of bonds.

Right on top of the oil situation, phase three kicked in. In early March 2020, the administration, Congress, the Federal Reserve, many of us money managers, and the population in general did not realize what extreme containment measures would be necessary, but by mid-March it sunk in. It became apparent that the required containment measures would bring the economy to a halt. On March 12, the PGA cancelled the remainder of the Players Championship amid a rapid sequence of announcements of other closings and cancellations: NBA, MLB, NHL, PGA, LPGA, NCAA, Kentucky Derby, along with restaurants, bars, theaters, non-essential retail, schools, and colleges. Society was shutting down an economy on purpose to stop a disease. During that third phase, stock prices were dropping as economists were slashing their GDP forecasts for second quarter 2020. During the third phase of the crash, from March 13 to the bottom March 23, the S&P 1500 dropped 17.7%.

From the peak February 19 to the low March 23 the S&P 1500 Index lost 34.5% in twenty-three trading days—thanks to a bat, a pangolin, and a virus.

Abnormal Peak

Based on magnitude, a drop of 34% is enough to declare that the great bull market ended a few days short of its eleventh anniversary. Yet that great of a bull market deserved a more dignified ending, a peak with conditions typical of other bull market endings. First would be extremely bullish investor sentiment with a “damn the risk, full speed ahead” approach to investing. Second would be the Federal Reserve tightening to slow the economy and fight inflation. Third would be overpricing in stocks relative to value. None of these conditions existed in February 2020.

Sentiment. The AAII Investor Sentiment Survey (shown in Chapter 1) taken the day of the peak, February 19, 2020, had a ratio of bulls/bears of 141.5%, below its historic average of 146% and below readings seen at previous peaks: October 2007 (212.0%), March 2000 (349.9%), and August 1987 (1100.0%). Typical peak-type optimism was lacking. Instead, there was still a healthy level of skepticism.

Monetary Policy. As for the Federal Reserve, it was not tightening but just the opposite. Its three moves prior to February 2020 had been quarter-point rate reductions in the Federal Funds rate August 1, 2019, September 19, 2019, and October 31, 2019. That easing boosted the Y-O-Y rate of growth of the money supply to 6% to 7%, plenty adequate to support economic growth. Fed easing does not usually end bull markets.

Value. At the peak, the ICON normalized market value/price ratio, an average of about 1,700 domestic stocks, was 1.16 suggesting stocks were priced about 16% below our estimate of fair, or intrinsic, value. Just the opposite of being overpriced at a peak, stocks were, on average, underpriced. In Chapter 1 you saw that this market V/P had been a reliable guide during the eleven-year bull market and it has often been in disagreement with those who thought the P/E on the S&P 500 was too high. There were claims in February that stocks were overpriced based on P/E, but those were the same claims we had seen being wrong for eleven years. They must be discredited because as we showed in Chapter 10, there is no statistical relationship between P/E and stock prices one year later. Stocks didn't drop 34.5% in twenty-three days because they were overpriced. They dropped because society was about to shut down the economy on purpose to attempt to contain a virus, when only weeks before the virus was thought to be unlikely to spread to the United States.

Stunning Visual

From the low of the volatility event December 24, 2018, to the market peak February 19, 2020, the S&P 1500 Index gained 46.18%. As seen in Figure 14.1, it was a fairly steady advance. Then crash! The visual shows how stunning the sharp drop was. In twenty-three trading days the index dropped to a level last seen November 11, 2015. The crash wiped out the 75% gain of the final thirty-nine months of the bull market.

We confess to feeling angry at the sudden crash and we wanted our money back, so we turned to a theme often heard in music. Country Western, the blues, and even pop have featured a victim who lost his pickup truck, horse, money, or girlfriend and felt swindled or duped. As this is an investment book, we will stick with money. In various phrasing, they declare, “you may think it's funny, but I lost all my money and I want my money back!”

Off of the March 23 low we started the “I want my money back” tour. We told financial advisors and their investors that we believed we were in a new bull market and to get the money back that the crash took away they only had to do three things: (1) be invested, (2) be patient, and (3) tolerate volatility. We reasoned that doing those three things wouldn't be that difficult and we could get our money back.

In our April 2020 Portfolio Update, which was written a few days after the crash, we stated, “For investing, you have to ask yourself one question. What do you think the world will look like a year from now? If the answer is that the coronavirus will be under control with perhaps even a treatment or vaccine, then we believe it is prudent to own equities at these prices.”

The next chapter looks at the market rebound to see if it had the same unloved behaviors as the eleven-year bull market.