It’s a Bear Market now, all right! But what kind of bear will it be?

March 18, 2020

Well, there you have it! Just after I wrote a post two weeks ago pointing out we hadn’t even reached a Bear Market yet, all major U.S. indices, including the S&P 500 and the Nasdaq Composite tanked and fell into Bear Market territory last week and even touched the -30% mark after the precipitous fall on Monday. 

So, it’s a Bear Market now, all right! But not all Bear Markets are created equal. Which begs the question…

What KIND of bear will this be?

A little cuddly Panda Bear like in the picture above? Or the fearsome Grizzly Bear? Here are some of my thoughts and reflections on the Bear Market…

Bear Markets vs. Corrections

Remember the chart from two weeks ago? I updated it comparing the current equity meltdown with the previous five corrections (all post-global financial crisis), see below. This goes up to yesterday’s close, 3/17/2020. And now it does indeed look quite a bit more menacing than the other 5 events:

Bear Market Stats Chart01
S&P 500 Total Return during 2020 Bear Market and five prominent corrections. Note: I set the starting point right right before the big drop, not necessarily the all-time-high. For some of the corrections, the ATH occurred a bit earlier. Starting date 0 at the all-time-high would make the drawdown slightly deeper/longer!

And, for comparison, here we have the last two bear markets: one started in 2000 and in 2007, respectively, in the chart below. This is starting at the peak level, measured in Total Return (dividends reinvested) and for the 2000 and 2007 bear market starts I plot the return both in nominal and real inflation-adjusted terms. The current bear market is in nominal terms only because it’s still too short and the real vs. nominal wouldn’t make a difference yet!

In any case, while the 2020 bear market is nowhere near as deep as the previous two (yet), it’s surely much swifter than the other two! During the other two events, it took more than a year to reach the -29% (Monday low). So, this Bear isn’t messing around here, folks! They say “Markets Take the Stairs up and the Elevator Down.” I beg to differ: the last four weeks felt like the cable ripped and we fell down the elevator shaft!

Bear Market Stats Chart02
Bear Markets: 2000 vs. 2007 vs. 2020. Total return since the (daily) peak.

One other “fun” fact about bear markets: the year-2000 Bear Market hadn’t even recovered in real terms before the next Bear Market hit. That recovery took almost 13 years (4620 days). But it was hard to squeeze that all into one chart.

Thus, I like to reiterate one important point I made many times before, for example in my “Who’s Afraid of a Bear Market?” post last year: There’s a lot of bad and inaccurate advice out there, such as

“Nothing to worry about if a bear market hits, it will only last a year or two.”

That crucially depends on what you worry about. Notice, the length of the Bear Market is only the time peak to trough. If you’re worried about Sequence Risk you gotta be worried for as long as the market is below the peak. And that’s for CPI-adjusted returns! That can take a lot longer than one to two years!

Summary so far: Bear Markets tend to take a lot longer to recover than corrections. Instead of weeks to months, we’re now talking about years – potentially even a decade or more! Ouch!

So, do I expect a Bear Market as bad as in 2000 or 2007? Not necessarily. Historically, there’s a huge range of recovery times for Bear Markets. Again, recall my post from last year (“Who’s Afraid of a Bear Market?“) and the following pattern emerges; it all depends on whether we have a recession and if so how bad the recession may be:

  1. A Bear Market with no recession at all (e.g. 1987): That’s going to recover relatively quickly in a matter of roughly 2 years. And again, with recovery, I mean going from peak to trough and back to the peak, in real, CPI-adjusted terms, e.g., 23 months even in the 1987 best-case scenario.
  2. A Bear Market during/around a mild recession (e.g. 1968): Definitely a scary time for investors, especially retirees, but this kind of bear market is normally too shallow and too short to pose much Sequence Risk. Expect a recovery in 2-5 years.
  3. A Bear Markets during deep and prolonged recessions (e.g., twice during the Great Depression, 1970s, and the 2000-2013 period): A bear market that is deep enough and takes long enough to recover: 5+ years and in some cases even 10+ years!!! That will certainly pose a challenge to retirees due to Sequence Risk!
AfraidOfBearMarket Table02
Recovery from a Bear Market. Much longer than the often quoted 1-2 years! From the Bear Market post last year.

So, what kind of Bear Market will this be? Simple: We’d have to gauge how bad a hit the economy will take. No impact at all, a small hit or a major, prolonged recession. That brings us to the next point…

The macroeconomic conditions still look good. But for how long???

If you remember, I put together a “poor-mans version” of my macro market timing model. Specifically, I like to look at three indicators:

  1. The yield curve slope (10-year minus 2-year Treasury Yield): There were obviously some rumblings in the yield curve signal last year. The 10-year vs. 2-year slope very briefly inverted in 2019. But the inversion was very shallow and short-lived. So, I never really considered it a certifiable yield curve inversion. I also don’t quite see the connection between the 2019 yield curve predicting a 2020 recession when COVID-19 wasn’t even known back in 2019. Currently, the spread between the short and long end of the curve is solidly positive (0.36% for the 2Y vs. 0.73% for the 10Y as of 3/16), indicating that financial markets don’t believe the Federal Reserve is too hawkish.
  2. The weekly unemployment claims, released every Thursday: Unemployment claims come out weekly and as of the last release, Thursday last week, they still look rock-solid. I’d monitor this very closely and watch for a spike in unemployment claims to 300k+. This could happen really quickly!
  3. The ISM Purchasing Manager’s Index (ISM-PMI), released (normally) on the first business day of the month: The PMI had shown some weakness in late 2019 but then recovered again to 50.1 as of February. The only problem here: that reading for February, released on March 2, covers a period before there could have been much panic among those purchasing managers. We’d have to wait until April 1 to get a new reading on this indicator and even then it’s not certain all the macroeconomic impact on the business world has already been factored in.

How do I interpret this?  Going forward there are three possible scenarios:

  1. Since the macro indicators didn’t move yet, the drop in the stock market will be temporary. There’s only a mild slowdown, no recession. It’s another a mid-cycle slowdown. This bear market came about very quickly and it will also recover very quickly. Basically a 1987-repeat.
  2. It’s too early! There will be a noticeable impact on the macroeconomy and it will show up in the data only in April and May or later. And then we’ll have enough data to spot signs of a mild recession. But the stock market will be in the basement by then and the whole macro timing is useless!
  3. … or even a full-blown deep recession later this year.

If you ask me, I’d suspect we’ll be in case 2. It’s just a matter of time until noticeable signs of a slowdown will show up in the macro data releases. If travel is restricted, events are canceled, people stop going to restaurants and bars, production lines shut down, businesses furlough workers, etc. it must have an impact on the economy. It will likely result in (at least) a mild recession.

Will this potential recession reach the severity of the Great Recession or even the Great Depression? I don’t see that yet. True, one prominent faster-moving financial indicator, the VIX (“Fear Index”) is indeed as high as during the Global Financial Crisis. It went above 80 on Monday! That’s what seven trading days in a row with 100+ point moves in the S&P and 1,000+ point moves in the Dow Jones do for you. And I’ve sold S&P 500 put options with an implied volatility of more than 170% on Monday! Crazy stuff!!!

Chicago Board Options Exchange, CBOE Volatility Index: VIX [VIXCLS], retrieved from FRED, Federal Reserve Bank of St. Louis;, March 17, 2020.
But other indicators are not yet screaming crisis. High-yield spreads are elevated, but nowhere near what we observed in 2007-2009. Actually, we’re still more in line with the 2011 and 2016 market scares that didn’t even become bear markets.

Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis;, March 17, 2020.
Another measure of financial market stress is the “TED-spread”, i.e., the spread between the 3-month LIBOR (interbank lending) rate and the 3-month U.S. Treasury Bills. It rose a little bit but is nowhere near the levels we observed in 2007-2009. We haven’t even reached the levels of some of the post-GFC stock market corrections.

Federal Reserve Bank of St. Louis, TED Spread [TEDRATE], retrieved from FRED, Federal Reserve Bank of St. Louis;, March 17, 2020.
These are the kind of real-time daily indicators we’d have to watch while waiting for the macro data to trickle in over the next few months. Expect more uncertainty and volatility!

So, I’m definitely quite a bit more uneasy about the situation than two weeks ago. And it makes perfect sense to me now. If I look back at all the corrections I plotted in my chart above, they had very little potential to do any real harm to the economy. If you had asked folks in the street in August 2011 “Are you worried about the U.S. bond downgrade?” most people would have asked you back, “What’s a bond downgrade?” Same with the August 2015 Chinese devaluation. But the Corona virus is different. This is something that directly impacts a large number of people.

Right now, it’s impossible to gauge the damage this will do to the economy. Just to give you an example of how easy it is to underestimate the potential damage, back in 2007 a lot of really smart people argued that the subprime market blowup will be contained. “Yeah, nothing to worry about: the subprime market is small enough, even under pessimistic assumptions, the losses will be a few $100b, which is worth a few percentage points of the S&P 500 market valuation.” Nobody expected the stock market to drop by 56% and millions of people losing their homes and jobs. And potentially now again, for every Wuhan Virus death, there will be dozens of sick people and hundreds of scared people staying at home and not participating in the economy as workers, business leaders or consumers. So, even if casualties stay well below the worst-case scenarios, this virus has the potential to do serious harm to the economy and thus the stock market.

And I don’t even want to think about the worst-case scenario, but if you’re interested, see here for a thought-provoking discussion started by my blogging buddy “Gasem”. Also, make sure you check out his blog for some more info.

What now if you’re still saving for retirement?

What does this all mean for investors? If you’re familiar with my blog, you’ll know that I like to differentiate the impact of market volatility by where you are in your (financial) life. Most people in the FIRE community and also a lot of readers here are not yet retired. So let’s start with that case. How much damage can a bear market do when you’re still saving for retirement? Well, that depends on how far along you are with your retirement savings plan. If you had just recently started out with $2,000 in your 401(k) and you suffered a 30% loss, who cares? That $600 is easy to replace. In contrast, If you were at $2,000,000 and right before early retirement, a $600,000 loss will take some time to replenish. How much time? Instead of going through endless simulations, let’s just go through some simple rule-of-thumb calculations…

  • Assume you pursue FIRE with a 50% savings rate. You plan to accumulate 25x your annual consumption (a very crude rule of thumb, I know!) and you also save 1x your annual consumption (=50% savings rate)
  • You assume a 5% (real) rate of return and monthly contributions (0.0833x annual consumption per month). Same as in the MMM Simple Math post.

You can really easily calculate how many months you’d expect it would take to reach FIRE. For example, if you already have 6x your annual consumption in your FIRE stash you’d use Excel and compute:


i.e., with the 5 inputs:

  • 0.004074124 = the monthly real return =1.05^(1/12)-1
  • 0.083333 = the monthly contribution (=1/12)
  • 6 = the initial stash
  • -25 = (-1) times the final value target
  • 1 = indicating we invest money at the beginning of the month (set to 0 if you assume the contributions occur at the end of the month)

This yields 132.8 months, which I round up to 133 months.

Now let’s check what happens if we apply a 1-time “haircut” to the portfolio; the results are in the table below. Each row corresponds to an initial portfolio value (as multiples of the annual consumption target). The columns are for the base case of that initial capital (i.e., no bear market) and then a one-time market drop between 5% and 50%, in 5% steps. For example, if you start with 6x initial assets, it will take you 133 months to reach 25x annual consumption, as we computed above. A one-time drop by 25% would increase your projected retirement date to 148 months, 15 months longer. Not surprisingly, even a steep bear market prolongs your FIRE savings only by a few months if you’re still starting out on your path to FIRE!

Bear Market Stats Table01
Months to reach FIRE. Assuming 5% p.a. real returns, 50% savings rate. A Bear Market can wreak havoc on the projected time it takes to reach 25x consumption!

But if you were right before reaching FIRE, say 20x or more and the portfolio drops by 25%, you’re looking at about 3 extra years. Again, this is not written in stone because the market could recover much faster than 5% p.a., but some folks in the FIRE community might feel a bit deflated when they update their projected retirement date. Don’t be! Stay the course, keep investing and you’ll still retire way before you’d have ever imagined before finding the FIRE community!

What if you’re already retired?

Great question! I’m still working on this section. So, stay tuned for this portion as part of the Safe Withdrawal Series! Hopefully next week! 🙂


PS: if you find the title picture offensive…

I know, I know, I am being a little bit politically incorrect. Get it? Wuhan Virus? A Panda Bear in the title picture? How culturally insensitive of me. If even the mighty NBA has to kowtow to the Chinese Communists then who am I as a little one-man show in the blogging world? So, if I receive more than 1,000 tweets/retweets with complaints about my post I will gladly change the title picture to something completely, totally non-offensive. Like this one with an almost equally cuddly bear, see below. Hard to imagine that the Communist Party would have any problem with Winnie The Pooh, right?

Alternative title picture, just in case the Chinese Communist Party finds the Panda Bear title picture offensive.

And again, sorry if people are offended when I even associate that virus with China. Because, according to this really smart fellow here, Zhao Lijian, the Wuhan Virus isn’t from Wuhan at all, but it was smuggled into China by Americans. Just like German Measles and the Marburg Virus are actually from Kansas! They were just smuggled to Germany to make Germans look bad. Everybody knows that! When will the shaming of Germans finally stop? I mean, the French get their French Toast, the Danish also get a sweet dessert. The Polish and Italians both get their tasty sausages. And the Germans? We get stuck with highly infectious diseases. And cockroaches! It’s time to find less offensive names! And while you’re at it, please also rename the Norway rat! Because we always, always, want to be really culturally sensitive out there!

Hope you enjoyed today’s post! Please leave your comments and suggestions below!

Picture credits for Panda and Winnie:

146 thoughts on “It’s a Bear Market now, all right! But what kind of bear will it be?

  1. Unemployment will be through the roof. Glad I sold 50% of my portfolio in early Feb. Will sell a bit more on the next bounce.

    Stock markets are too optimistic currently. Once doctors start deciding who lives and who doesn’t get treatment and dies based on bed availability, people will realize the gravity of what we are facing.

      1. I hope you’re right ERN, but here in Colorado we had 3900 on Monday and another 6800 claims yesterday and I saw an article about Rhode Island having 7000 on Monday. If these numbers are average, then across the 50 states we are looking at a minimum of 400-550K claims and it’s going up from there because employers can’t keep paying their workers.

      2. There is no doubt in my mind that it will get that bad in several major cities in the US. Right now where we are on the expected infections curve, you can’t even see daylight between the line and the bottom of the graph. Hospitals are already beginning to feel the strain. Couple that with a blase society and you have a recipe for disaster. I’m not just blowing smoke here. As you always say, it takes a model to beat a model. I haven’t come up with a model to beat this model.

  2. Hi ERN,

    A sobering article indeed, particularly the return to peak timelines. I wonder though whether it would be more helpful to have an idea of the recovery from previous bear markets to a more ‘normal’ CAPE, of say 20. Many times the markets have peaked to an exuberant state, the ‘dotcom’ bubble being a case in point, so not surprisingly the journey back to that point has been long and painful.

    While I am here, I would like to wish you and all your contributors the best of health.

    1. With the SPX going below 2400 today, we’re almost there. CAPE is now around 22.
      I also agree that the CAPE in today’s environment ought to be higher than the long-term average (~16) due to higher retention rates and lower interest rates. So, 20 might still be more realistic, maybe even 22.
      Yeah, I suspect that due to the panic there will be enough damage and dashed confidence that we’ll not see CAPE>30 anytime soon. Don’t expect a recovery to new all-time-highs anytime soon!

      Thanks! Stay healthy everybody! We’ll get through this!

  3. Thanks for this. Really glad I read your SWR series well before I retired.
    For retirees, the other thing to note with this bear market is the correlation between the fall in the market and the fall in expenditure. I am, for sure, going to be spending a lot less this year simply because many of the things I normally buy in retirement are not currently available.
    I would have loved to see the 1987 picture in your bear market graph for comparison purposes.

    1. That’s certainly a way to deal with the drop in the portfolio. We will probably travel less, which is our #1 discretionary expense. Not sure if that makes up for the 30% in stocks, though. 🙂

  4. The wealth effect certainly works in reverse, and I think we’re just starting to see the beginning of that in financial markets. The average investor is going to feel a lot poorer, and his or her actions are going to reflect that very soon.

    Certainly the layoffs are coming… but as to how deep and how far those cuts go is anyone’s guess.

    For me the answer has been to hold way more cash than others have told me is sensible. I think in this rare instance my judgement will prove to be very correct.

    I sold a little in early February when I saw the start of this thing, but I wish I’d sold a lot more to bolster my cash reserves.

    Oh well, live and learn.

  5. Hi ERN,

    to all prediction of economic impact by virus… So far China seems to be leading indicator, this Monday:

    – industrial production y/y -13.5%
    – retail sales y/y -20.5%
    – fixed asset investment ytd/y -24.5%

    Even if you count on similar numbers in USA, you still have no idea how long does it take to weed virus out, it could take few months (3 months in China after really tought restrictions and virus is still there) or many months depending on the speed of steps done by government (unfortunately USA is pretty slow so far). What above numbers represent in terms of US index drawdowns? Hard to say, hard to say…

      1. One probably should consider that the numbers from China was when there was still full demand from most of the world still…

        Now they are up and “running again” BUT who are they going to produce for/sell to when the whole world now comes to a halt??

        Thats what I find extremely scary and especially since every company seems to be forced to cut back on everything…Laying off en masse, no more investments for 2020 etc…

        If Italy is any guidance as to what we in the west can expect it will not be pretty and the consequences will be even worse. Has there ever been a time in the history of the world where we are completely connected around the globe and politicians just stop everything (revenues basically zero whilst costs are still there…)?

        I would say no…The good thing is that we still have the internet so people can work and be creative etc to find solutions but our slow responsiveness will cost us dearly.

        Crossing my fingers that most companies can survive a complete shutdown for a few months but many will go bankrupt and so will individuals and social unrest is not far fetched in a scenario like that.

        I sincerely hope I am completely wrong and that something happens FAST which will enable us to get out of this situation as soon as possible.

        And BIG Earn, I salute you for your evey so insightful and brilliantly written posts!

        Stay safe.


  6. I’m a Hong Konger and I had been following your blog for a long time. I always love your thought-provoking analysis. I’m replying for the first time because as a Hong Konger, I really love your use of wordings in this article 😉

    p.s. Apart from money I think we should really concern about the virus and our health now. Always wear a mask and wash your hand could reduce your risk. If everyone could do more to stop the virus, the economy could also recover better! God bless everyone here.

    1. Thanks!
      Yeah, good luck getting a mask these days. The cheap masks (that don’t even protect healthy people) are sold out and the fancy, anti-viral ones? fuggeddabout-it! 🙂
      We are staying inside most of the time or sometimes venture outside but avoid people!
      God bless you all!

  7. Hi ERN,

    Thanks for another great article. I can across your blog 6months a go after hearing a podcast, and glad I did.

    I sat in a restaurant in London yesterday and watched the management lay off the entire staff for “at least 2 weeks”. The place normally has 50 people and there were just 2 of us yesterday. It made me think of that Ray Dalio saying “One person’s spending is another person’s income”.

    The knock-on effects of the social distancing measures will be huge, and probably not just in the travel and hospitality sectors. Some UK online clothing retailers have reported a large drop in sales over the last week. A lot will depend on the duration of these measures and people’s willingness to get back to normal afterwards.

    I got through the UK leaving the ERM, 9/11 and the GFC so am not phased by this. The problem when you get close to retiring and the market drops 30% is that the numbers involved are just so big! Oh well, I’ll need to move the date out a few more years I guess.

    Thanks for your thoughtful insights – keep up the good work and stay safe.

    1. Thanks Mark!
      Very good point. People getting laid off, not spending, no more investments for a while, etc. That will definitely do a trick on the economy,
      We’ll make it through but it will be a lot worse than Brexit, 9/11, etc.
      Hopefully not as bad as the GFC.

  8. We’ve been hoping you would post in these turbulent times! We were weeks away from my husband giving notice when this happened. We have cash (MM/CDs) for 2 years and 30% in bonds…our SWR at the beginning of the year was a bit under 3.5%, but now we find ourselves around 4.1% (varying a little every day, lol).

    Our minds are boggled by the feeling that the SWR is arbitrary. If we had calculated it in January for the year, no problem. If we calculate it now, eek!

    For now, he’s still working until we have a better feeling for how long this will last and what the longer term impact will be. Incredibly frustrated by the timing! (And obviously very concerned for all those affected by this stupidly virulent virus.)

      1. … 4.1%?

        I am really hopeful that in your followup you will maintain the same get-to-the-airport-on-time methodology you’ve done so far.

        IMHO, this is unlike anything we’ve seen since the great depression – a global, correlated, trans-national severe economic slowdown that has only just started and is likely to continue for 10 to 19 months, and only then will sectors of the economy really start to recover. The sum of the effects of this are probably unknowable but we’re only just getting started. Right now we are witnessing the start of the extinction of pretty much the entire hospitality industry.

        I want to understand how to survive the “Bad Bogle” scenario 🙂 Hey, you named it. Using the standard CAPE10 parameters, and a current CAPE10 of 22, the suggested SWR is 3.38%. Given the very extensive economic disruption AND the latency before recovery can really start, I’d want to “get to the airport” assuming a really bad traffic jam.

        1. To imagine we’re witnessing “the start of the extinction of pretty much the entire hospitality industry” you’d have to imagine that after this resolves people aren’t going to visit restaurants, bars, hotels, etc. Really? Seems dramatic and unrealistic. Many unfortunate small business owners may fold their cards, but there will quickly be those appearing after the return to normalcy to take their places and profit from any reduction in capacity.

          1. you can have an extinction event that basically wipes out 90% of the species in an ecosystem. later on, it can be repopulated with new species that rebuild in the aftermath.

              1. I meant for hospitality, not people. The extinction is due to the shutdown of patronage and the reality that these businesses run very lean. In the Bay Area, this is already happening – layoffs and closures.

                In a year, people will start investment again, buoyed by the availability of used gear (which is how all restaurants that actually survive begin), but for now it’s quite apparent that the industry is going to be nuked by the decline in business and the ongoing pernicious issues of very high rent for space in this area.

        2. CAPE of 22 would imply a SWR of about 1.75%+0.50/22=4.02%. That’s for permanent portfolio. If you’re willing to slightly deplete your portfolio you can add a little bit more and 4.1% seems safe.

          1. I was using the 1.0 intercept. I’m curious if there are references for 1.75 being a permanent portfolio amount – I did read SWR part 18.

            1. I used the 1.75 intercept because it has done all right over the last 30 or years. 1.0 would have been way too conservative with initial SWR way too low and withdrawal amounts going up really strongly over time in retirement. It’s better to start a little higher and then have a sideways-moving trend.

  9. I have been following this virus closely since January, and the main thing I have noticed is that everyone consistently downplays the effects it will have. The best explanation I can come up with is that everyone is suffering from “I must pretend this isn’t happening, because otherwise I would freak out!” I bought masks in January when it was clear this was likely to become a pandemic. I got out of equities before the market started dropping because it was obvious the market wasn’t pricing in the effects of the virus. It’s actually made me question the EMH – people’s judgement is clearly impaired by their emotion.

    To contain the virus, we need full lock down for approaching three months – and massive layoffs are already happening today. The idea that this won’t create cascading bankruptcies is hard to believe. I am also intensely skeptical that monetary policy can do much to help when people become afraid for their lives to leave their homes. (This hasn’t happened yet – the existing social distancing must be enforced by the government because people don’t take it seriously – but just wait until people start having friends and relatives die from the virus.)

    And it isn’t like this will just be gone in three months. At least one country will contain the virus, and we’ll continually have re-imported cases until we achieve herd immunity or develop a vaccine. We’ll need to maintain some level of social distancing for a year or more.

    Personally, I’m warning my friends and family that they should be preparing for a Great Depression magnitude event.

      1. South Korea’s containment is most likely due to widespread testing, contact tracing, and high levels of mask usage in the country in general. (Lowers R0 significantly when everyone is wearing a mask.)

        1) There is no way we can get everyone wearing masks here, when there is a global shortage which is about to get much worse.
        2) We’ve abysmally failed to test at the rate we would need to in order to contain it here. Perhaps after we level off the curve our testing can catch up, so this might not be insurmountable.
        3) South Korea, Singapore, Hong Kong, and China all have more collectivist cultures than we do, and the people there are in general more aware of their social responsibilities to others. In the rugged individualistic “I’ve got mine” culture of the US, compliance with public health measures will be lower. You can already see this in the huge crowds that were going out prior to restaurants and bars being shut down.
        4) The public health professionals seem to be pretty united that this will not be contained in three months. According to this study ( “The major challenge of suppression is that this type of intensive intervention package –or something equivalently effective at reducing transmission –will need to be maintained until a vaccine becomes available (potentially 18 months or more) –given that we predict that transmission will quickly rebound if interventions are relaxed.” I think that we should believe them.
        5) It will be harder to contain in the US due to people working when sick because they don’t have PTO, people not self-isolating because they cannot afford to, etc. Not to mention there is a significant cohort here who still doesn’t even believe that the COVID-19 threat is “real”.

        I believe that we will eventually flatten out the curve – but that still doesn’t change the fact that globally the virus will not be contained, and people will still have fear to go out in public, to travel abroad, to rent their homes, etc. until the pandemic has ended. There is no way we can keep the cases here at 0 while other countries have active spread.

        1. Re your point 4 above – an awful lot of people seem to have over-looked this critical point!

        2. I see understand. But I think in the US we have one advantage over those other countries: We’re more spread out and we use cars more instead of public transportation. I cross my fingers that this will slow the spread.

        3. I like all your points. As to point 1) I believe at some point we can have enough masks for everyone. Every single person in China is wearing one, and required to wear one outside, and they have a much bigger (and much poorer) population. I’m not sure if wearing one will become culturally acceptable down the road. All of the countries successful at controlling COVID-19 thus far use masks pervasively.

  10. Hi Big Ern,

    Thanks for this article!

    I really appreciate your unflinching willingness to say it like it is. The majority of the blame for the current situation falls squarely on the shoulders of that Winnie-the-Pooh look-alike Xi Jinping and his fellow cronies in the Chinese Communist Party. The deplorable and deceitful actions of these thugs needs to be called out.

    1. Thanks Stephen. We need to call out bad behavior. Plain and simple. It’s actually dangerous not to do so.
      Also, this is not anti-Asian, it’s not racist. People should call out the CCP/leadership. The Chinese people are their victims too!

    2. Great article. Though not one mention of the correct name for the virus – COVID19 or Corona virus.

      1. The correct name of the virus is SARS-CoV-II. COVID-19 is the name of the disease it causes, it’s an acronym for “COrona VIrus Disease 2019”. If you are going to be pedantic, don’t make such mistakes.

  11. Given this site is read by folks with at least a passing interest in maths models could I suggest a careful reading of the following summary of the Imperial College (IC), London Report “Impact of non-pharmaceutical interventions (NPIs) to reduce COVID-19 mortality and healthcare demand” of 16th March 2020.

    The full IC report – some 20 pages long – can be easily found on the Web if you want all the gory details!

    1. Bill Gates noted in an AMA yesterday the assumptions there were too liberal – based on influenza trajectories – and not taking into account more containment seen so far in actual data

  12. What a great article once again, ERN! I really enjoy the way you analysed both the (possible) length and depth of the bear market and the impact on your expected FIRE-date of a market downturn in your wealth building years. Keep up the great work, I (still) consider you the #1 FIRE-blogger! Kind regards from The Netherlands!

  13. Awesome article! I’m so thankful to read somebody detailing and discussing the facts instead of fluff. I commented on your last “Bear” post about how quickly the supply chain disruption will happen in these days of highly automated factories. Well it is not even a week later and we are seeing OEM plants shut down/reduce production, and multiple suppliers shutting down because of cluster outbreaks. I’d be shocked if they all were not closed this time next week. Look at the demographic of the UAW, they are right in the crosshairs of what this virus likes to target.

    The flip side of all of this now becomes the systemic risk of the problem of shutting down for Covid19 to save lives, could cause more damage than if governments let it burn through the population at a rate that is essentially at the peak of our hospitals capacity. Do just enough social distancing and closures late in the game to flatten the curve, but not too much to risk the second wave being worse than the first (like the Spanish Flu). What a dilemma, we have to keep producing and working or else everything goes to hell, but who wants to risk it?

    1. Yes, that’s a concern of mine too. We have the short-term effect. But growth going forward will be stymied too. Much less cheap parts from China and Just-in-time inventory going forward. That will dampen productivity growth for years, even decades.

      1. Well my comment didn’t age well, all Auto plants are now shutting down. 8 million workers associated with auto manufacturing in the US. For what it’s worth, most of production is already just in time today and has been for decades.

  14. I think the low-key “I’m just being politically incorrect, lol” parts aren’t really called for, especially given the WHO guidance on this stuff:
    or yale school of medicine:

    It isn’t just people being “offended”, this stuff reinforces behavior that actually impacts real people:

    1. OK, we got one complaint. 999 more to go.

      My reply: you lost me when you referenced a paper from Yale U that claims “Wuhan Virus” is inaccurate. I totally agree that sometimes the truth can hurt. That doesn’t make it untruthful. The virus origniated in Wuhan.

      Associating my calling this the Wuhan Virus with racist attacks on Asian people across the world is akin to blaming me for people robbing banks after write a blog post helping people to bring their finances in order. Preposterous!

      And since you mentioned the WHO:
      I haven’t seen any official statement from the WHO condemning, in the sharpest form, the initial behavior of China, trying to hide the outbreak, even though it’s stated policy to inform the WHO of an outbreak as soon as it becomes apparent.
      And I haven’t seen any condemnation of the Chinese claim that this is an American virus.

      1. You’ll of course call it whatever you want! For me though, I’d rather follow the guidance of what the experts think is a good idea. I don’t think you are being racist; I think you’re being edgy and are pissed (rightfully) at China. But words matter, especially in a time of misinformation elsewhere online!

        I’ll repost the source for guidance and why the recommendations were made here for those who happen upon this and are interested:

        1. Let’s make sure we appreciate the true experts at the WHO, that are experts in the field of medicine. But for every one of those you have dozens of politicians, lawyers and other useful idiots at the WHO that have put out the following dangerous stuff:

          January 14: Tweet by the @WHO: Preliminary investigations conducted by the Chinese authorities have found no clear evidence of human-to-human transmission of the novel #coronavirus (2019-nCoV) identified in #Wuhan, #China.
          Parroting the Communist line that turned out to be a complete lie. Great! Let’s all go crazy on Chinese New Year because we got the blessing from the WHO and CCP! Thousands of people died because of this lie!

          February 3: WHO chief says widespread travel bans not needed to beat China virus
          I’m glad we didn’t follow this woke, moronic advice in the US. Italy did and we all see what’s happening there.

          I have quite a few others, but I’m getting too worked up and angry about this.

          Also, again: I’m being critical of the CCP, not the Chinese people, not Asians or the Asian race. In fact, my wife is Asian and lots of people in the Asian circles I frequent are even more upset about the Commies in China and this ill-advised political correctness than I.

          1. Then why not call it the CCP virus? Instead, you want to follow the example set by our great president. The “my wife is Asian so I can’t be a racist” card is pretty weak too.

              1. It’s true that there have been many viruses named after places, so I agree that there is nothing inherently racist about a virus being named after the place of origin. But for this specific virus (as with SARS, or HIV/AIDS which is thought to have come from non-human primates in Africa), there is already a name that is accepted worldwide (SARS-CoV2 or COVID-19 for the disease). So, what is the purpose of calling it Wuhan Virus? What is the motivation to call it this and what does it achieve?

                1. Hey, I actually see the case for not calling it Wuhan virus. Tactically, it’s better to not offend anyone until the whole thing is under control and we need everybody’s help, including the Chinese.
                  But once this all done and over, we should have an investigation into what went wrong. Both in China and at the WHO. And we most surely have to shame the guilty parties. Maybe shaming them through the name of the virus is not called for.

                2. I agree that China (and other parties) should have to answer for the cover-up after this is over. And end the wet meat markets since we have now had multiple novel viruses originate there.

                3. Well said! Otherwise, China might get a taste of it: Have some regional disruption in China but destroy the entire rest of the world’s economy. There has to be some sort of retaliation/punishment to ensure future compliance.

      2. ERN, Thank you for your posting all of your content – very informative.

        And also, thank you for providing just a little bit of levity on a very serious topic. Ironically your link to the ‘China bans Winnie the Pooh film after comparisons to President Xi’ provides some additional fodder as this type of thing will likely be occurring here in the US in the not so distant future. When we are restricted in the use of our words, we become subordinate to those who feel compelled to dutifully make us aware of the impact these words may have on others. As you so graciously pointed out in your response above, this is typically a one way street.

        It is quite interesting to note many people who consider themselves anti-fascist actually support many of the ideas that fascism or totalitarianism support. Freedom of your words being one of the most important. Next, they will go after your thoughts. So, please lets keep those to ourselves.

        1. Thanks for saying this.Very well said! I have noticed many examples of people operating under the premise that you are allowed to do bad things as long it’s for a good cause. That attitude is a serious problem!

      3. I agree with Sam on this one, so I guess that’s two if we’re counting.

        It seems kind of a weird to imply that because the WHO hasn’t done something, you should ignore all of their recommendations. Can one can disagree with specific (in)actions while still agreeing with other recommendations?

        1. I don’t ignore their recommendations. I only ignore the recommendations that come from the “lawyers, politicians and useful idiots” that have nothing to do with the mandate of the WHO, but instead are just virtue signaling, woke B.S.

  15. Outbreaks are commonly labeled by their geographic origin: Ebola (river in DR of Congo), Marburg. MERS, Hong Kong, Flu, Lyme, Zika, West Nile, Lassa, etc., so the objections against labeling this Wuhan/Chinese are misplaced.

    Funny that you mention the “German viruses” because German Measles aren’t from Germany but rather named after the researchers that studied it, all three from “Deutshland”
    Initially the “Spanish Flu” was widely publicized only in (WW-I-neutral) Spain, while all the WW-I combatants tried to keep the outbreak a secret from the world. While it’s still possible that the flu originated in Spain, it’s more likely that it started elsewhere, probably even in Kansas. Of all places!
    Norway rats are definitely not from Norway at all. According to Wiki, “Thought to have originated in northern China, this rodent has now spread to all continents”

  16. ERN, I always look forward to your well thought-out posts especially during this turbulent time. I finally pulled the trigger to retire early at the start of the new year. This is definitely not the early retirement I had in mind. I stopped looking at my portfolio after it went down by 20%. I did a $10k Roth conversion about 3 weeks ago but in hindsight I should have waited. I have about 3-4 years of cash cushion, but it’s unsettling to see your chart on the recovery time. As much as I’m enjoying the time freedom, I’ve decided that I should look for a job and go back to work. I’m looking forward to your follow up post on people who have already retired (especially recent retirees). Stay healthy and be safe!

  17. Hi Ern,
    Just started reading your BLOG in the last 2 months as I am real close to retirement. If we, the people don’t get a handle on this, it could be much worse for our health, our way of life and the economy. My portfolio is underside down (38/62) last I checked although likely 20/80 now. We all need to work from home, stay away from crowds and follow the guidelines… wash hands etc.Only essential people should be physically going to work eg. Drs, Nurses, Fire, Police. What will really make this Bear market short is a vaccine. We need one NOW not in 18 months. Understand there is a company in Mass that is testing one with 50 people in Washington and other companies are also stepping up. I am sure we will have plenty of volunteers for this. Remember when we had people dying from cancer and the FDA was reluctant in approving clinical trials for certain drugs? The women were dying and likely going to die anyways why not not give them hope and let them try something. Think one of drugs was gene based and was effective. Same here. We are not going to let 2 MILLION people die because of this. We can’t. If we do it is on US(pun intended).

    1. Yeah, I have faith that if we find a vaccine this will be fast-tracked. Not sure if that’s fast enough for this flu season, though.
      I have more hope (hype?) in the already available Malaria drug that seems to work on COVID-19.

      1. I am confident that there will be vaccine(s) and/or anti-viral treatments for COVID-19 sooner than 18 months. They might come from outside of US first because FDA is too restrictive, which is generally a good thing but not when dealing with a global pandemic. Sure that will include a few false starts as well but that’s not any worse than the disease itself.

        The same sky is falling was predicted many time before but the sky did not fall, can not fall because sky is not a thing!

        What does worry me is the possibility of this spreading in a densely populated and poor country like India and actually causing a lot of damage. But I think they are relatively safe now because it is already hot and viruses thrive in winter.

        Regarding financial impact, the governments seem to be acting very fast including direct (freshly printed!) money to people so the worst case scenario will likely not happen.

  18. This is a great and scary enough post without even reading the comments. I am wondering where the line is between rational thinking and fear-mongering. We can see that Jon’s comments show that s/he is totally freaked out which is not helpful for people who are trying to keep a little bit of hope that it’s not the Great Depression yet and that hopefully, the leaders will step up and do their part without finger pointing.
    OTOH, maybe Jon is right and going forward it depends on one’s luck who will stay employed or who will be thrown on the street. Unless you work in medical field now, a lot of people should be concerned about their jobs. Anyway, these are the thoughts based on the comments I’ve read so far.

    Now I have a few questions while waiting for your next installment.
    You, Big ERN, said you would retire with 100% in equities. Did you move anything to fixed income or cash since the signs of corona virus became well known? How are you managing your portfolio nowadays? Is it all in an IRA now or still in 401k with your former employer? Of course, if your blog income covers all your monthly expenses then it’s great but if not it would be interesting to read how a real FIRE’d family with 100% in equities (who doesn’t like dividends either if I recall correctly) is managing this now. It’s for people who don’t generate passive internet income and don’t have a real job now.

    I read that people FIRE’d in their 30-40’s with a little cash or fixed income allocation in the past few years or even last year when the Bull Market was ‘blooming.’ Of course, it’s moot point to give advise right now, but I am curious if you would have changed your advice on the AA if you had known about this crisis coming..? What should such retired people do now when the stock market seems to have a pattern DOWN now (green one day, red the next, green again, followed by red and the trend is definitely down)? Should they sell at least some of those falling stock funds and put in the bonds (the current haircut has taken us to 2015 or 2016 at the moment) or just let it ride but at least move dividends to cash before those funds stop sharing them?
    I’m asking these questions because not a lot of people know how to do options/puts/calls like you do.

    Another reason I’m asking how to handle this situation now is because it’s REAL now. Pundits always said/wrote that you should choose your AA based on your risk tolerance. Ha! Seeing some random 10%, 25 or 40% down on paper is easy until the real events hit you and you see that 30% (for now at least) is hitting your 401k. So, discussing this stuff now is real despite some regretting not being in 30-40% fixed income before retiring or virus hitting their retirement portfolio. This does look like a pattern now. 2000’s, then 2009, and now 2020…

    Thanks for reading my rambling thoughts and would love to hear some answers 😉

    1. Adrea – I can see why my comment might seem like I’m “freaking out”, but to be honest I really don’t believe I am. I feel calm, I’m prepared for this as much as one can be and I’ve helped my family prepare – hell, I’m even young enough to not have to be overly concerned for my own health, just that of my loved ones.

      If anything, I think the fact that I’m set up to weather this storm makes me more willing to take an honest look at where the signs are pointing than those who will be severely harmed if I’m correct. I think for them there is an unwillingness to believe that I could be correct. You address this yourself: “[my comments are] not helpful for people who are trying to keep a little bit of hope”. I agree! My comments are not intended to be helpful to your sense of well being or hope. They are intended to be helpful to your planning for what is coming, since actual action is what will matter in the years ahead, not sentiment. If you find my arguments compelling, start doing what you can to prepare now.

      Anyways, people can disagree with me, but I don’t think it’s fair to discount what I’m saying by accusing me of being emotional. If anyone disagrees with my conclusions, let’s discuss the pertinent facts.

      Wishing you all the best in this trying time.

      1. Jon,

        My statement about your emotions, etc. came purely from reading your words “I got out of equities before the market started dropping because it was obvious the market wasn’t pricing in the effects of the virus.”

        I interpreted your words as an extreme alarm or that you’re a prophet or one of the luckiest market timers. If you’re right, I darn wish I got your note two months ago because I didn’t get out. I looked at our portfolio at the end of last month and our fixed income went from the set 25% to 28%.
        Guess what, I’m not tempted to login into accounts now but I cannot diagnose the exact reason for that.
        I’m either afraid to see the balance going from two commas to one comma now or I am afraid that once I see one comma I might get scared and start selling everything and moving to bonds now because I read people like you or on other forums or in the media that it will be extremely bad rivaling the GD.

        Out of curiosity, what did you do before the GFC? Did you sell everything in 2008 because it was very clear that there will be a crisis in 2009? If not, why?
        I did quite a bit of selling in 2009 just because I was reading in the forums about a lot of people telling to jump ship. I was susceptible to that and felt that I ‘have to do something”. In the end it was not necessary to do that. Of course, I am clueless whether I’m making the same mistake again this time by not listening to you because you might be very right. If I had your crystal ball telling me to sell now and it will tell again when I can ease into the market again, it would be totally awesome.

        1. Adrea – appreciate your response.

          I consider myself a Boglehead, and I actually found it difficult to actively take action to get out of equities rather than “staying the course” because the little voice in the back of my head was telling me I shouldn’t “try to time the market”. And I agree with that voice! But in this case, I had been following the virus early on, and watched what happened in China, and I read the scientific publications guessing the number of cases and the infectiousness. While it was not guaranteed that it would spread internationally, the fat tail risk was so enormous that I couldn’t believe the market wasn’t reacting. Maybe I did get lucky, but the market did react – just a few days later than I did. As I said before, rather than feeling like a prophet, I actually feel incredulous that almost nobody else took the threat seriously earlier, and I suspect it has to do with the fact that we’re emotional animals and not logical ones.

          Regarding your situation, I am not advising you to get out of equities now. If you are already retired, I hope that you have chosen an allocation and a withdrawal rate that you have calculated to get you through a Great Depression level event. If not, and I don’t mean to be rude, the error was made before – not when you failed to get out of equities.

          I am not advising my relatives and friends to get out of equities now – I’m telling them to stay the course – because they had appropriate allocations for their age and risk tolerance. When I said to prepare, what I meant was:

          1) If you haven’t yet retired, do everything you can to keep from losing your job
          2) Cut all discretionary spending immediately and work to build up your cash reserves

          If you are retired, you were 75 percent equities, and your withdraw rate cannot handle this sort of event, then perhaps it is still better to rebalance somewhat into bonds now, even though ideally you would stay the course. But to be honest, I’m not even sure that bonds will come out the other side of this faring well. These are uncharted waters.

          I was 19 during the GFC. That may lead you to discount what I believe, thinking that this is my first bear market as an investor, and I can’t blame you for that. Yet I used to hold very high risk assets before I became a Boglehead, and once saw my portfolio drop 93%, and I stayed the course (and was rewarded for doing so). A ~30% drop in the market doesn’t frighten me at all. The effects of the coronavirus on our society and economic system do. We’ve targeted efficiency as the expense of resiliency at all levels, and now we are paying the cost.

          My advice: If you’re still working, stay the course! Don’t panic and sell in response to my comments. But do prepare yourself for some real hardship.

    2. I find it interesting that in the US now days (maybe other places as well), when people disagree with your opinion, it is you who must be thinking irrationally or are fear-mongering. What happened to the days before all the PC verbiage and ‘safe places’ were created, when people could actually be ok with hearing another persons opinion without attempting to demean the other person. What happened to articulating one’s own argument in a clear and concise manner, rather than telling you how insensitive you are being. I guess those days are past, and that type of thinking allows me to be called a relic. Possibly, thought provoking ideas are now becoming relics as well.

      As for the markets, I would dare guess there is a direct correlation between 1) what a person finds acceptable in others comments, and 2) one’s current position/holdings in the markets. For example, if a person is still holding a rather large portfolio of long equities, any talk of a protracted virus pandemic or financial recession/depression will be met with words of how irrational and fear mongering the holder of these opinions is. On the other hand, if a person is in cash, or has a portfolio shorting the equities market, then this person may not think this topic to be irrational or fear mongering at all.

      If one can hypothesize that ones beliefs are stronger than logic or rational thought, one can understand why America is so divided when it comes to topics such as science and theories alike (and yes, this includes market theory as well).

      There is quite a lot of interesting data/information available about both this outbreak (the health of the citizenry) and the health of the financial systems. Depending upon your disposition, there might even be enough data/information to make a rational/logical decision about what to do next with your assets.

      Remember at the end of the day/week/month/… health is wealth.

      So, please be healthy, as your wealth will not matter if you are not.

      1. Scott,
        The stock market is mostly driven by emotions of investors at both ends of the table. This is known to everyone.
        It’s strange that you’re trying to politicize this comment stream when investors/savers disagree. This country is divided because of right and left politics and incapability of making compromises anymore. I don’t get it how you came up with such an idea of division when people disagree in investing and financial matters. What do you call marriages that end up in the divorce court because one spouse spends and the other tries to save for retirement? So one is rational and the other is irrational…Anyway, not even sure how to interpret your comment. Sorry, for being insensitive but politics shouldn’t be brought up here.

        1. @Andrea…. is your post intended to be humorous? You responded in exactly the way Scott described.

    3. I think Andrea’s comment reflects a genuine desire to find balance between under/overreaction during these strange times. Individuals & institutions are dealing with many unknowns right now. Uncertainty is perfectly reasonable.

      Regarding a 100% equity AA: Sure, over the long term the math works. But as this post points out, it could take 10 years or so to recover losses. I’ve noticed common features of FIRE bloggers who prefer 100% equities. Some live in very low COL countries. Some practice extreme frugality and/or don’t have children. Many earn some type of income/rental income/pension.

      Most importantly, many have saved at least a few million dollars. I suspect even if ERN’s portfolio were cut in half (or more!), he would be fine. The loss would hurt, but obviously a much better position than the person who invested their entire $1mil savings all in equities, suffers a 50% loss, and now must draw down from $500K. Also, how many of us will realistically be trading in options/puts, etc?

      I’m not the target audience here, just a humble passerby. So while I’m very grateful for the information these bloggers provide, I filter the information accordingly. MMM’s math may be simple… life is not. I think of my retirement $ more as savings than an investment, and my horizon is not as long as some. I accept the trade-offs incurred by investing less aggressively, such as lower returns and working longer.

      Best of luck to you, Andrea, with whatever AA you choose in the future. I doubt now is the time to make any changes if you can avoid it.

    4. I retired with 55% in equities, 10% real estate and 35% in options trading.
      I make 10% of our annual budget from the blog (advertizing+affiliate). I can see that a lot of readers doubt the credibility of a lot of FIRE bloggers who preach 5% WR and 100% equities. Easy to not worry then if they don’t withdraw from the portfolio but rather live off the blog (or spouse’s income).
      But I like to reiterate here: I actually do live off my portfolio (for the most part) and my wife is retired, too.
      For folks who don’t want to get into options trading (takes a lot of math and some time commitment) I have always, always urged people to have a meaningful amount in bonds. 25-40% depending on circumstances. And with bonds I mean safe goverment bonds.

      1. Hey ERN. Your options book is long Spooz ∆ so that means you 90% equities BEFORE any leverage gearing.
        Just sayin’

        1. Again, the 35% short puts is anywhere between 0 and 85% S&P Delta. Most of the time I have a Delta of only 0.05. So, with 2.5x leverage I get 12.5% equity exposure from puts plus 55%. That’s still OK in my book.

  19. Appreciate the great data Big Ern!

    Curious on your thoughts about the bond market. It performed as I expected the first couple of weeks but has gone into reverse since the Fed took rates down. Feels like corporate default risks are rising, and maybe that is leading to higher treasuries?

    1. Treasury yields are down and prices are up since 2/19/2020. So, the negative correlation between stocks and bonds persists. A little bit of positive comovement for a few days, but the negative correlation is still intact.

      Different story for anything non-US-Treasury. The market was in total panic mode and even IG corporate bonds (LQD) sold off. High-yield and Preferreds got hammered as badly as stocks.
      Muni bonds are down. Anything with even the slightest risk or illiquidity got hammered.

  20. Thanks for the POST. It hits close to home. I’m in that category of “was about ready to FIRE” and now looking at a disappointing 3-year delay according to your chart. But I wanna think its not that bad, because you’re assuming only 5% average ROI during the recovery, which I think is too conservative. 5% ROI is a good market average over long periods that include bears and recessions, but if you look at recovery bull markets in isolation without the bear periods, you tend to see average returns more like 9-10%. In some sense, FIREing at the bottom is better, because you’ll likely be immune to sequence-of-returns risk, no?

    1. I doubt the 9-10% assumption. Don’t get me wrong: I believed the 2018 drawdown was overdone and, lo and behold, we saw +31 in 2019. But I think this drawdown is a bit more persistent and permanent than the 2018 selloff, that most people in the street can’t even provide a rationale for anymore.

      So, if the Shiller CAPE is any guide, CAPE=22 implies a real equity return of 4.5% (=1/22) over the next 10 years. Add 1.5% inflation and we’re well below the -10%.

  21. > Great question! I’m still working on this section <

    this is very, very interesting to me.

  22. The Fed just cut interest rate 100 bp landing at 25. The effect of the rate cut on long term treasuries seems quite muted. In fact today TLT droped nearly as much as the S&P did 5.64% vs 5.65%. Is this an indication the long term treasuries have (at least for the near term) lost their relatively inverse relationship with the S&P. Seems like there is no where for rates to go (unless we are headed into negative territory) but up? Thoughts?

    1. Treasuries and equities both have huge volatility right now, so their usual correlation of 0 is presently more like 1.

      1. Just so – but what is the implication for the long treasuries going forward? My stone age caveman view is that since the fed target rate is so low there is potentially little upside in holding them unless they are contemplated against an envionrment where there are in fact negative federal interest rates.

      2. Not true. The negative correlation is still intact. About -0.5. There were a few days when bonds+stocks moved together (both fell) but in the big picture we still have negative correlation.

    2. Interest rates overshot on the downside. There was a rebound in interest rates and that’s not an indication that the negative correlation between Stocks and Bonds will go away anytime soon.

  23. Great Article ERN! I’m a lot more pessimistic. All of the other economic numbers are great but an economy runs on productivity PERIOD, and something like this virus is an arrow directly in the heart of productivity. I’ve seen all kinds of death rates from 1% to 4%. I think 1% is way low. I hope 4% is high. I hear the argument 40K/yr die from flu! Like that is supposed to be comforting. The death rate for flu is 0.1%. This means if we choose a 2% death rate for Covid we get 2/0.1 or a projected death rate 20 times greater than flu. If we infect the same number of people that would be 20 x 40K or 800K predicted deaths. But wait there is more! Some with serious infection can recover but that recovery DEPENDS on big gun medical care. if half die and half recover that means 1.6M deathly sick (2 x 800K) There are 100K ICU beds in the US. This means a far higher death rate than 800K since life depends on life saving treatment.

    The virus embeds itself into humanity indiscriminately. This means presidents are as likely as paupers or prisoners to get it and once gotten have a 2% chance of death. In business employees are not interchangeable. A Jr engineer may be able to design a bridge, but a senior project engineer can specify and build one UNDER BUDGET. The company makes money only when the bridges are under budget. If the senior dies YOU’RE HOSED. If 10 seniors in a company die you may well be out of business. You better crap your pants when you say it’s an old man disease. In Italy the MEDIAN ICU age is 63. This means half are above 63. What about the other half? Who might populate that lower half improportionately? How about senior engineers, physicians, lawyers, C suite etc men and women 50 and above. The hit on productivity is obvious. I’ve seen several reliable projections this shut down may extend to August or Sept. I saw Denny’s was lining up revolving credit. Deny’s has 1600 stores. If Denny’s is limited to take out only that’s 20% of the business. Do you think Denny’s has a 80% profit margin? Do you think workers laid off in 1600 stores contribute to productivity? Do you think by August Denny’s will still be alive?

    The Hong Kong experience is that 20 – 30% of infected have significant to severe respiratory damage post recovery. This is young and old alike. I’ve seen the MRI’s and they are flat out mind blowing. What happen when maybe 15% of the penetrant population are respiratory cripples? How much on going medical care might they require? Can you sill work if you can’t walk fast, and what jobs? What does that do to productivity? Right now the only way through to immunity is through infection. Infection leads to maybe 2% death and maybe 15% disability. How sure am I of my analysis? Last week I sold out my entire portfolio. I am 100% in cash. I’ve done the 13 years to break even analysis also. I am also now depleting my resources AKA I am now liable to SORR. My analysis is I can survive easily for 30 years on cash depending on inflation. I likely can’t stand a >50% and maybe permanent Japanese style 30 year hit. It cost me about a years worth of gains. I own what I owned in March 2019 and I’m protected for further downside. I had tax loss harvest stored up so I got out tax free. My advice store up tax loss harvest

    Also my boomer cohort holds too many stocks. Those stocks are worth less and will be required to be sold yearly. This means instead of a bias of endless and mindless accumulation in passive funds there will start to be no further accumulation or much reduced. In the first few dip buying opportunities in this crash indexes were bought. The last one they were not bought. They were rallies that were sold into. Today’s rally was heavily sold into as decumulation begins.

    As to economic indicators I follow volatilities. VIX hit 80 3 times in the past 1987 2008 and now. That’s a 5 standard deviation move. In GVX (gold vol) hit 51 a 5 standard deviation move. In addition OVX (oil vol) hit 160 a 5 SD move and then TYVX (10 yr bond vol) went from 4 to 27 an almost 7 SD move. Normally these asset classes would be uncorrelated but today they are perfectly correlated in terms of disrupted volatility IN EVERY CLASS If that isn’t a black swan I don’t know what is. People like to call vol a measure of fear, but it’s not fear Vol is a measure of uncertainty as the market seeks to ascertain truth. In an environment where the truth is that unknown (5 standard deviations in every cass) I went risk free into cash, so now my risk is inflation. I also eliminated SORR. I will reinvest eventually once the biology patho-physiology and epidemiology of this virus is known and we know who the next president will be. Sorry for the long one but I think useful.

    1. GASEM, thank you for your contribution to Big ERN’s valuable site. As with ERN’s wisdom, your insight into the many facets of the current market dynamics are much appreciated.

      While I may not hold all the same beliefs, I ask myself the question that you may have been asking yourself when you exited the market – ‘the market may turnaround any day, but what if I am wrong?’. For that, I chose to minimize my risk by going to cash. I left the equity markets late august and went into bonds, and left the bonds last week when I saw pretty much all asset classes going down (even the ones you point out which are supposed to be inversely correlated to the equities market).

      There is a lot at play here, and I am not smart enough to get the timing correct. So, I do what I can and go risk off. This may be a different strategy than others are taking, and I am not saying it is the correct one, but if you ask yourself what if you are wrong – you may get an very insightful answer.

      An interesting side note: based on one of the other comments made from a Big ERN reader (see comments above), I decided to look up unemployment claims around the US, and found this very interesting recent quote from the governor of California – Gavin Newsom –

      “We average about 2,000 unemployment insurance claims a day,” Newsom said. “Two days ago or three days, we saw about 40,000 applications. After that 70,000 applications. Yesterday, 80,000 unemployment applications.”

      So, while I may believe the markets will turn around any time, what if I am am wrong? Food for thought…

      Be well.

      1. Well played. Those employment numbers are amazing. In addition, I saw Cai was preparing for possible Marshal Law. Not that that will happen but just the fact it reached the media is chilling. I never heard of a state preparing for Marshal Law before, especially a place like Cali. My choice was based on game theory. If you’re accumulating, as a class you’re fairly well protected and all the FIRE books are mainly about accumulation. If your narrative is wrong you just work more. Retired, you are protected only by your narrative. If your narrative proves false your fortune evaporates. You can count cards at blackjack to gain the statistical advantage but if you bet wrong you will be wiped out just the same.

    2. Hey Gasem – medical/economic question for you. I buy your market analysis and the financial implications could be profound left unchecked but there are also some other forces in play. The thought has crossed my mind that a treatment or vaccine at this point it worth trillions…and while there is medical rigor and process in the US, different countries are willing to take different risks and paths. If you put on the “by hook or by crook” hat for a second what to do you think the possibilities are of someone coming up with a vaccine or treatment that blunts covid in the near term (say 6 months)? I am not in the medical field, which is why I am asking, but it seems like the financial pressure to get covid behind us is tremendous…and that might mitigate things near term, albeit in perhaps an unnatural way.

      1. Corona viruses seem to confer immunity for only a few years so there won’t likely be permanent immunity BUT once well established in the population it will be harder to get the R0 much above 1. Once below 1 the virus dies out, so the virus will go from pandemic to epidemic. The reason this one is a bitch is 1. its novel meaning no immunity anywhere and 2. It’s very deadly. 3 the way it kills is by burning out the lung. As the virus mutates it tends to loose some of its deadly-ness. It’s not productive for a virus to kill too efficiently.

    3. Thanks again for another informative comment!
      Yeah, I’m pretty pessimistic even with relatively benign medical assumptions. Even if this gets under control and we suffer “only” 10,000 deaths from this, the economic toll will be astronomical. Even worse under your assumptions, which I hope will not come to pass.

  24. I am a retired healthcare administrator. I operated cancer centers for over 25 years. My clinical staff was well prepared to handle and monitor immune compromised cancer patients through annual flu seasons which averaged killing 20,000 Americans annually as well through H1N1 Swine flu, SARs, MERs epidemics etc. Therefore, CoVid-19 the disease doesn’t concern me, however, it’s the operating deficit, which currently stands at an annual addition to our debt at $1 trillion and could balloon as high as $3 trillion which will add to the operating debt of $23 trillion as we respond with deficit spending to stem the economic consequences of this disease. Moreover, I am concerned about the growing unfunded liabilities of nearly $134 trillion for Medicare, SS, debt held by public, etc. What effect do you think our debt will have on growth, retirement, and our children and grandchildren’s future Prof ERN?

    1. Yeah, well said. As sad as the many deaths are, the economic damage from everything around it (social distancing, deficits, corporate bankruptcies, etc.) will be the real killer.
      More debt = more future expected taxes = lower growth rate.

  25. I’m curious people’s thoughts.

    It seems clear we are doing what we need to do right now (maybe we should be doing more) but we are doing it because we lack alternatives, not because it is the most tailored option. Testing and therapeutics need to improve. The reality is that it is a choice to shut down business on this scale and it need not be the choice over a long haul and I question whether it really can be a choice beyond several months without causing other problems with similar grave impacts. Flattening the curve seems like it needs to be about more than just preventing overload at hospitals but also about buying time so that a less extreme form of social distancing can be adopted. Do people see us continuing this approach indefinitely or that we will make some harder trade-off choices in the future and now’s the time to do some things to potentially give ourselves some better choices.

    I’m not trying to make light of these measures or downplay the potential downsides we are all going to be experience, but are our leaders really going to run the global economy into the tank for extreme periods of time just to “flatten the curve”? At some point, economic realities are going to kick in. Health is wealth, but it’s also true that a certain level of economic activity is needed for health.

    1. Yeah, there’s a huge tradeoff. I hope that we get the R0 to well under 1 soon. Then it’s a matter of (carefully!!!) relaxing the constraints again to limit the damage on the economy.

  26. The models I’ve looked at using Asian non Chinese data shows if you shut down severely you can 100% stop spread, but your economy dies. If you then lift quarantine the virus returns. If you don’t shut down you maximize death and morbidity but the economy at some level survives maybe. So threading the needle is probably somewhere in between.

    1. I agree that the modelling predicts that the spreading of the virus will quickly rebound if/when the interventions are relaxed. The gist seems to be that the measures may well need to be maintained until a vaccine, or other forms of innovative technology, become available. It may be possible to periodically relax the suppression measures but the modelling predicts that, for any one area, the measures need to be “on” around 2/3 of the time.
      I guess, in due course, China & South Korea could help clarify the rebounding prediction.

      Can you point me to a source for severe respiratory damage post recovery?

    2. I’ve seen these models too and wondered about the efficacy of a shut down to deal with wave 1, massive testing to determine who needs to remain in quarantine and then staged lifting of the shut down for various cohorts/sectors. I’m hoping people start defining how to thread that needle, because that’s a large “in between” as you have it currently defined.

  27. Look for sources that show CT scans post recovery. Since I can, I just read the scans and generally don’t read the verbiage that much so I don’t have a source. The scans have what is called a “ground glass” appearance. In China they went to the CT to diagnose and didn’t screw around with kits. Between symptoms and CT the diagnosis was made, then if there was a question they tested. What they found were horrible CT scans in people with little or no symptoms. The way this virus woks is it attacks the alveolar cells where O2 and CO2 transfer occurs that line the lung. Imagine those cells all lined up next to each other in a rectangle like a shower curtain. On one side of the curtain all of your blood flows every minute. The blood exchanges with air on the other side to acquire O2 and expell CO2. You breath in O2 and breath out CO2. Every cell in your body relies on this exchange to stay alive. If low O2 the bodies cells start producing excessive acid. Acid is transported as CO2 to the lung to be expelled, so low O2 and high CO2 is bad. If O2 is low enough and CO2 is high enough cells body cells start to die. The virus turns alveolar cells where this transfer occurs into scar and those little scars are found throughout the lung hence ground glass appearance. If you line up good cells on the shower curtain at the top and scar cells at the bottom what you find is the surface area of good cells are dramatically reduced. If the surface represents 100% capacity and 50% of your cells are scar your ability to exchange )2 and CO2 is now 50%. Exercise recruits lung capacity. The harder you work the more lung capacity you need and the limit of your ability is 100% capacity after that you’re out of steam. If 50% of the lung is scar 50% is your new top limit so running goes to walking as your max exercise capacity, and if you get the regular flu (not COVID) after the scar forms you become very sick just from the flu. This is known as being a respiratory cripple since your respiratory disease limits you.

    Here is a story I Googled

    1. Thanks for the explanation; I asked as I suspected it did not sound good.

      Is recovery or partial recovery of the damaged lung function possible?

      1. Anything is possible, the human body is an amazing thing. If damage isn’t too severe you may get some % better over time like with quitting smoking, but that’s a long term process. This is not like the flu so the recovery is not like the flu. This condition is called pulmonary fibrosis and the treatment is lung transplant in the severest of cases. My father died of pulmonary fibrosis. Not a fun disease. Sorry to be so morbid but you can’t make judgement about your life and protect your family without access to the truth. By the way these CT scan results extend into teenagers as well

        1. No need to apologise; I appreciate both your candidness and your preparedness to share your knowledge.

          The Chinese use of CT (vs testing) was news to me. This is very interesting and there are plenty articles on the Web that expand on this point, including, apparently, less false negatives, etc, etc. However, what I could not find was any guidance as to what the widely reported Chinese COVID-19 testing figures really mean. Do you know?

          I appreciate that this is not a med blog, so a reference, pointer, or even clue, by way of a response would more than suffice.

    2. I know not the right way to think of things from a medical diagnosis stage, but for my wife who fears always that she has various illness, is the very normal readings she is getting on an oximeter suggestive she shouldn’t worry (yet) that she has COVID?

  28. The blame absolutley falls on the Chinese Communist governement. They should have shut down those wet meat markets long ago. The Chinese government actively sought to silence people who were talking about the Corona virus in November. They arrested people for it, forced them to recant true statements about the virus. They deliberately suppressed, jailed and disseminated false info about the virus.

  29. ERN keep up the great work. I am looking forward to your post on the market situation for current retirees.

    For people interested in the math of modeling epidemics there is a series of interesting articles in the NY Times recently.

  30. Thanks for another detailed and very informative post, ERN!

    I tend to think we humans as one of the few (only?) species that can think about and plan for the long-term then conflate that ability with a hubris that we can also predict the future.

    The media is certainly full of “experts” with often wildly varying predictions — and it seems some people forget the media is a for profit enterprise so there is an inherent bias towards the more attention grabbing opinions (not to mention the agenda driven “fake news” both foreign and domestic).

    I’m hopeful after the initial freak-out subsides there will be a more targeted approach to this corona virus that isn’t so damaging to people’s livelihoods, the economy, and retiree’s nest eggs.

    As a country we’ve accepted that the benefit of motor vehicles is worth the annual cost of almost 40,000 deaths and 4.4 million injuries, I think this corona virus should be viewed through a similar cost / benefit lens.

    As a mid-50s early retiree, my “sleep at night” allocation included ~4 years of our annual expected spend in cash and ultra-short term bonds. In a pinch we could stretch that to 6 years by reducing discretionary travel and entertainment. That is a larger “safety net” than ERN’s safe-withdrawal rate analyses would require, but it is what we’re comfortable with.

    Best wishes and stay well!

    1. Yeah, that 40k figure is scary! I doubt that public will warm up to a corana death figure in that order of magnitude, though…

      Wow, great planning! 4 years of cash definitely helps. We also notice that our discretionary spending is now down a lot. So, you’ll likely stretch that to 5, 6 or even more years.
      Good luck and stay healthy! 🙂

  31. Hope you’re not offended if I call you a [redacted]. Too bad we all have the German virus called [redacted].

  32. So what are you thoughts on the shape of the hoped-for recovery now, Big Ern, in light of both its dreadful retrenchment and the stock market’s bullishness? It is entirely reasonable, of course, that the forward-looking stock market is not tied to current and rearward-looking economic data. That said, my overall portfolio value is about where it was in mid-December 2019. I have, however, after capturing much of the current market’s recent gains, dialed down my risk exposure (increased options footprint, real-estate holdings, and moved assets guaranteed 3% fund I have access to through a retirement plan) as I cannot fathom the current market realistically supporting the same equity values as it did mid/late fall of 2019. I will never mistake you for a soothsayer (which, of course, you would never claim to be) but I would like to know what you think at this point in time of where this recovery (or lack thereof) is headed?

    Thanks as always. Stay safe and be well.

    1. Yeah, we’re a bit priced for perfection. You’d need a relatively short disruption, huge negative growth for a few months and then positive growth a slow return back to +/-0 in GDP level and earnings by the end of 2021. Then you’ve lost 2 years of growth. That would justify a drop by ~15% from the peak, i.e., where we are right now.

      Anything worse happening, like a second wave, a mutation to a more deadly virus, etc. would justify huge drops in the market. But the market seems to discount that possibility right now.

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