S&P 500 Crashes As Second Levy Flight Event Of 2020 Nears Completion

Through the close of trading on Friday, 28 February 2020, the S&P 500 (Index: SPX) has experienced the fastest stock market correction on record, falling by more than 10 percent from its record high peak of 3,386.15 on 19 February 2020 to 2,954.22 on Friday, 28 February 2020.

We've captured most of that decline in our alternative futures spaghetti forecast chart for the S&P 500, which we've animated to show the decline in the period from Friday, 21 February 2020 through Friday, 24 February 2020. This portion of the market's decline captures most of the second Lévy flight event of 2020, which got underway on Tuesday, 25 February 2020.

Since then, investors have nearly completed refocusing their forward-looking attention away from the distant future quarter of 2020-Q4 toward the nearer term future quarter of 2020-Q2, which has been accompanied by the rapid collapse of stock prices, just as we predicted [1] would occur in response to China's coronavirus epidemic going global a month ago, in accordance with a dividend futures-based model that describes how stock prices behave.

(Click on image to enlarge)

The driving factor behind the decline in stock prices during the past week is a conflict that has erupted between investors and central banks, where the credibility of central bankers over expectations of the future for their monetary policies has come into question. ZeroHedge describes how that battle escalated during the latter part of the week, as investors considered the coronavirus epidemic's impact on global supply chains and the economy and reacted to what they increasingly saw as fecklessness on the part of monetary policymakers - in this case, at the European Central Bank.

With Christine Lagarde blowing up the market's hopes for an emergency coordinated central bank rate cut, traders have decided to switch to the "stick" approach, and instead of asking nicely for another bailout from the Fed, they have decided to force one through.

That apparent fecklessness wasn't limited to European central bankers, which you can see in the fourth week of February 2020's market moving headlines below:

Monday, 24 February 2020

• China braces for inevitable big hit to economy from virus, says Xi
• Oil sinks 4% on demand concerns as coronavirus spreads
• Central bankers will look at options for responding to coronavirus: Mnuchin
  • China central bank says to launch new measures to counter coronavirus impact
  • Kuroda says BOJ will be 'fully prepared' to act on virus risk
  • Bank of Korea seen cutting rates to record-low to battle coronavirus: Reuters poll
  • Fed's Mester sees U.S. economy performing well, coronavirus a 'big risk'
  • Coronavirus set to deal heavy blow to Italy's ailing economy
• Markets bet Fed is pushed to cut rates in coronavirus response
  • U.S. Treasury yields tumble, curve inversion deepens as coronavirus spreads
• Wall Street plunges on fears of coronavirus pandemic
  • Coronavirus sparks deepest S&P 500 drop since early 2018

Tuesday, 25 February 2020

• Oil falls for third day as virus fears accelerate on U.S. warning
• Bigger trouble developing in the Eurozone, Mexico (Note: before China's coronavirus became a thing):
  • Falling exports bring German economy to standstill in fourth quarter
  • Mexican economy shrinks at close of 2019, extending recession
• Fed's Clarida: We are 'closely monitoring' impact of coronavirus
• Wall Street plunges as coronavirus spread sends investors fleeing

Wednesday, 26 February 2020

• Oil prices drop to lowest in more than a year as coronavirus spreads
• Lower mortgage rates, mild weather lift U.S. new home sales to twelve and a half year high
• Bigger trouble, literal money laundering, developing in China:
  • China's January auto sales fell 18.7% year-on-year, worse than forecasted
  • China orders disinfection of banknotes in coronavirus fight: report
• Bigger trouble, bigger stimulus developing in Germany, Eurozone:
  • German economy nears stagnation in first quarter with coronavirus outbreak
  • Germany may ease debt limit rules as pressure to spend more grows
  • Markets bet on December ECB rate cut as virus fears escalate
• Wall Street falls more slowly as investors parse coronavirus fears

Thursday, 27 February 2020

• Oil prices dive to lowest in over a year on coronavirus fears
• Traders betting Fed will slash rates amid coronavirus threat
• What the Fed's minions were focusing on today as markets were plunging:
  • Highlights: Fed policymakers on why diversity matters and how to get there
    • Too white, too male: Fed takes on diversity one bank board member at a time
  • Fed's Evans: too early to cut growth outlook or rates on coronavirus
    • Fed's Evans says above-target inflation 'essential' in future
  • Fed's Fisher Stuns CNBC: "Time To Wean Generation Of Money Managers Off Their Dependency On A Fed Put"
    • The former Dallas Fed official's comments were both a good illustration of the mindset of many current Fed officials and also perhaps the most counterproductive of the week in how they badly damaged their credibility.
• But the European Central Bank's minions' statements were worse, which sparked off the investor rebellion:
  • ECB plays down immediate action against economic impact of coronavirus
  • ECB's Knot says coronavirus to hit economy harder than SARS
  • ECB's Lane says coronavirus poses risk to economy if it lasts
  • Coronavirus 'no catastrophe' for economy: ECB's Holzmann
  • ECB won't be able to ignore risks if virus persistent: Schnabel
• Meanwhile, in China and in the Eurozone:
  • Nearly a third of firms in China suffer shrinking revenues as coronavirus bites: survey
  • Coronavirus hit brings home Italy risks for yield-seeking bond investors
• Stocks plunge on coronavirus fears even as U.S. ramps up fight against spread

Friday, 28 February 2020

• Oil prices sink to lowest in more than a year
  • U.S. crude oil output fell in December for first time in five months
  • OPEC leaning towards larger oil cuts as virus hits prices, demand: sources
• Fed minions start thinking they may need to do something:
  • Powell says Fed read to act as coronavirus poses evolving economic risks
    • Federal Reserve Will 'Act as Appropriate to Support the Economy'
  • Fed's Bullard: U.S. rate cuts 'a possibility' if coronavirus intensifies, not base case
    • Bullard: Market pricing will not dictate rate cut, Fed policymakers will monitor events up to March FOMC
    • Bullard: Fed already insured against shocks like coronavirus (but are they really?)
• Worse than the Fed in the Eurozone:
  • ECB rate setters see no need for action as coronavirus spreads
  • ECB's Weidmann: No need for immediate monetary policy action due to coronavirus
  • France: "force majeure" can be declared over coronavirus in contracts with smaller firms
  • ECB could hold extraordinary virus meeting if needed, Vasiliauskas says
• Stocks Extend Fall to Cap Worst Week Since 2008
  • Coronavirus panic wipes $6 trillion off world stocks this week

Stock prices may have begun to stabilize on Friday, 28 February 2020 with Fed Chair Jerome Powell's comments indicating the Fed may soon move off its "no change is needed" mindset. We'll see how stable the developing new equilibrium might be in week ahead.