How the longest bull run in history ended in pandemic panic

As a collapse in the oil price unleashed chaos in financial markets, Madrid money manager Diego Parrilla phoned a colleague who agreed: they had better head to work early in the morning.

By daybreak in Europe, the price of crude oil had fallen by a third. The shock had turned worry about the coronavirus to full-blown panic, wiped trillions of dollars from Asian stocks and sent futures for European and US markets plunging.

“We assessed the book,” said Parrilla, 46, who runs a 300 million euro ($332 million) fund that is long gold and bonds and uses options to bet on just about everything but dollars and volatility falling.

“We were in a good position,” he said. “We decided which parts of the portfolio we would take profits on first.”

So began what became the worst week on Wall Street since 2008, which has left Parrilla one of the few winners in the shakeout that ended the longest bull run in US history. His Quadriga Igneo fund is up 30% for the year to date.

The wipeout has also exposed the complacency of investors as markets marched toward record peaks in February, and the inadequacy of their protection as traditional risk correlations broke down in the rout.

And for others it holds both clues as to what happens next and great promise.

“It’s these times that great fortunes are built, not bull markets,” said James Rosenberg, private client advisor at brokerage and wealth manager Baillieu Holst in Sydney.

“But you have to buy the right companies, you have to have an appetite for some pain and misery and you have to be patient.”

Oil shock

The twist that sent markets already stressed by the global coronavirus outbreak into a tailspin was a plunge in the already weak oil price that followed Saudi Arabia’s move to launch a price war with Russia last weekend.

The 30% drop had oil-linked currencies cratering – the rouble fell 9% – and the stock prices of household-name oil majors from Shell to ExxonMobil were down by double digits.

By day’s end, the bonds of heavily indebted energy firms were trading many times beneath their face value, and fears of a credit crunch were growing.

It was at this point that Parrilla, who had argued for years that equities were overvalued and that the cost of betting against them in the options market was good value, was laying fresh bets.

“We came in on Monday, and we see things are happening. And from a disciplined point of view, we were actually putting more trades, on things that were lagging, such as the VIX,” he said, referring to the Chicago Board Options Exchange’s Volatility Index.

Talk on trading floors and at funds from Sydney to Singapore, Hong Kong, London and New York, was of crisis.

“When these big things happen, then you have no floor,” said Sean Taylor, chief investment officer for Asia-Pacific at German asset management firm DWS. “You can’t really work out the fundamentals, it’s not priced in,” he said.

Taylor spent the evening on a phone hook-up with other regional chiefs to discuss the oil move, followed by another meeting the next evening to go over global economic forecasts.

“When it happens, you can’t do much about it,” said Taylor, whose experience in the Mexican, Russian and Asian financial crises in the 1990s and the global financial crisis in 2008, taught him hard lessons about liquidity and helped him prepare.

“People laugh at the old-fashioned techniques of the older guys, but when it happens we come out slightly better, because you’re not caught with midcaps and liquidity. It’s liquidity that really gets you in these markets,” he said.

Wrong-way Wednesday 

Which is more or less what played out through the rest of the week, after what proved to be a dead-cat bounce on Tuesday.

US President Donald Trump’s announcement on Wednesday of surprise restrictions on travel from 26 European nations, his failure to mention medical measures that would be taken to combat coronavirus and disappointment over the European Central Bank’s decision not to cut interest rates didn’t just put stock indexes into freefall.

Rather than fleeing into safe havens, investors sold them to cover other losses. Bond yields, which had dived only days earlier, rose. At the same time volatility in the currency market shot higher with the squeeze in liquidity.

“The amounts are smaller, but the spreads are much wider because liquidity is starting to disappear from the system,” said Stuart Oakley, Nomura’s global head of flow FX in Singapore.

“The markets have become so disorderly the correlations between assets and currencies have completely broken down. We’re in an entirely different world. It’s unnerving bigtime, because it tells you people are being forced to unwind positions.”

Black Thursday

By Thursday it had become a mad scramble for dollars and nothing else, with the Dow Jones Industrial Average suffering its worst day since 1987. After a big rebound on Friday, the index was down 10.4% for the week while the S&P 500 index had shed 8.9%.

When Australian fund manager Geoff Wilson woke at 2 a.m., as is his custom, the tone of voice alone on CNBC was enough to know the crash he had begun to prepare for was on.

“This has happened so quickly,” said Wilson, whose firm Wilson Asset Management runs roughly A$3 billion ($1.84 billion) and has more than doubled its cash exposure over the past three weeks.

“To me this is a combination of ’87 and the global financial crisis,” he said, having spent the week between work and home revisiting every investment thesis to weed out weak stocks.

“We’d bought them because when interest rates are low and the economy’s going reasonably well, then debt wasn’t a major concern … now that’s out the door.”

By the end of the week Europe’s benchmark STOXX 600 index had fallen 18%. Australia’s ASX 200 index was down 11% and the S&P 500 was headed for its worst week since 2008.

Like Parrilla in Madrid, who has another leg of bets on a further downturn in China, Wilson expects things to get worse before they get better.

Others, though, are finding some of the discounts irresistible.

Scott Flanders, former chief executive officer of Playboy Enterprises and the head of online insurance marketplace eHealth, called his brokers in New York at breakfast time in Palo Alto, California, on Monday.

“I’m putting money to work right now,” he said.

“I bought 5 000 shares in JPMorgan, I bought Bank of America and Citigroup. They’re getting hit hard … but they’re so much better capitalised than they were during the ’08 crisis.”