Is This Market Sell-off Done?


By Monish Chhabra ǀ March 17, 2020

Yesterday was the 2nd largest percentage crash in many markets, in their recorded history. This single day crash was bigger than any day in the 1929 crash, and second only to the crash of 19th October 1987.

From their peak, the global markets have now fallen by about -30%. In this article, we postulate what paths the markets can take from here – are we near the bottom, or can it get much worse, and if so, then how much worse, and by when.

We start by looking at the markets just before this crash, when they were at their peak at the end of December 2019. We draw both the developed and the emerging markets in one graph.

We super-impose the last 30 years of the developed markets with the last 20 years of the emerging markets. This is done to show that the bubble in the developed markets in the last decade of the 1900s, was similar to the bubble in the emerging markets in the first decade of the 2000s. And eventually, they both normalize to a similar slope of growth over time.

The orange graph shows the emerging markets, with its time axis on the top. The blue graph shows the developed markets, with its time axis at the bottom. Both the graphs are on logarithmic scale. The dotted blue line shows the mean-trend line, which reflects the average growth over time. The top two red lines show the high-trend lines, which reflect the peak points of the past trends.

As of the start of the year 2020, both the developed and the emerging markets were above the average trend line (the blue dotted line). They were, no doubt, on the high side. However, they were not at the extremes of their possible highs, which is what the red lines show.

The markets could have kept going higher, towards the high red lines. Or, they could have corrected down towards their dotted trend line. Both paths were possible. The market took the latter path, and chose to get the correction going.

Once the correction starts, it may not stop at the dotted line. It can fall lower. The following graphs shows what has happened in the market so far, as of 16th March 2020. We include the dotted blue line, which shows the average trend over time. We also plot here two green lines, which are the low-trend lines, showing the bottom points of the past trends.

The markets have fallen rapidly; they have gone below their average trend line (the dotted blue), and are now near the first low-trend line (the top green).

Based on the history, there is 80% chance that the markets would bottom around this line. And this could likely happen within the next 2 weeks. The following shows our 80% probability scenario.

If this higher-probability scenario comes true and the first green line holds the crash, we could see the bottom within 10-20% from now; within -10% for the developed markets and within -20% for the emerging markets.

However, there is 20% chance that we could fall further down, to touch the second low-trend green line. And this could likely happen within the next 10 weeks. The following chart shows our 20% probability scenario.

If this lower-probability scenario comes true, and the crash goes all the way down to the bottom green line, we could see a further fall of 30-40% from now; about -30% for the developed markets and about -40% for the emerging markets.

Markets tend to move with certain statistical probabilities and paths, over time. If they are our guide, a lot of the damage is already done. The fear and uncertainty in the markets is in the top 1% of the range ever recorded.

8-out-of-10 crashes in the history tell us that 2/3rd of the crash is already over and the bottom is near; about 10-20% fall from now, within the next 2 weeks.

However, there is still a 2-out-of-10 chance that only about half the crash is done so far, and the markets could go down much further; about 30-40% fall from now, within the next 10 weeks.

In any case, the markets are no longer on the high side. The panic would likely subside over the next few weeks. And the things bought wisely during this time, would be great buys in hindsight.

There is no reason to be greatly fearful, or fiercely greedy. Stay invested, pick wisely and be balanced.

This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.