Second Wave Fears and the June 11th Market Sell-off

RavenPack | June 17, 2020

What caused the recent market meltdown? The media has argued that the Coronavirus “second wave” fears are most responsible for the drawdown (hardest hit on June 11th).

Second Wave Theme in the News

We looked at the media coverage signals and found that the “second wave” news volume drumbeat peaked on June 11th, around the NY market open.

News volume of unique stories covering the “second wave” of the Coronavirus

While this factoid may appear to support the notion that the “second wave” theme was the obvious catalyst, we do not see a clear trend when observing it over a longer period; the peak, in truth, appears rather contemporaneous, with full history suggesting that this stand-alone signal should be interpreted with caution.

News volume (24-day rolling average) of unique stories covering the “second wave” of the Coronavirus

Market Overoptimism About 2021

In reality, there are likely multiple factors that contributed to the selloff. The United States economy has officially entered a recession, with 2020 earnings estimated to be down 20% for the year. Yet, the S&P 500 has experienced a V-shaped recovery.

This doesn’t necessarily mean that the market has decoupled from the underlying market fundamentals, however. Rather, it suggests that the investors have largely written off 2020 and are focusing on the recovery in 2021 and beyond, with some estimates calling for a 30% increase in next year’s earnings. Of course, it is quite difficult to predict quarterly earnings, let alone any results a year from now.

This sets us up with an interesting dynamic, whereby uncertainty plays an outsized role, given the extended time interval, acting as a fulcrum. The market has set itself up to expect an optimistic set of scenarios next year, if not a full V-shaped economic recovery. This optimism is also reflected in the more positive news sentiment around U.S. employment, which does not align well with the official unemployment estimates just yet, although it does reflect much better than expected figures.

U.S. Employment Sentiment (10-day moving average) vs. S&P 500 performance

Any data suggesting that the recovery might take a longer time to materialize and that market optimism could, therefore, be misplaced, will have an outsized effect on price action.

To conclude, we can safely infer that the recent surge of second wave fears may have been the trigger for the significant market drawdown starting on June 11th, but that the underlying reasons may be more nuanced. For example, another factor could be signs of a negative sentiment trend forming within U.S. corporate events (equity actions, analyst ratings, price targets, revenues, earnings, acquisition & mergers, insider trading etc.) in the preceding days.

Weekly and Quarterly U.S. Corporate Sentiment

The pronounced negative trend started around June 8th, just a few days before the June 11th selloff. Looking at a longer timeframe, there was no other clear shift in the overall U.S. corporate sentiment trend since the beginning of February, days before the Coronavirus crisis started. This inflection may suggest that other underlying factors may have set the stage for the broader selloff.

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