Bernie Sanders Crashed Markets in March 2020, Not COVID
Revisiting what really happened to markets in 2020 shows just how quickly and easily market narratives are both adopted and forgotten.
Yes, it’s true. Not only was it NOT COVID that shoved SPX off a cliff in Q1 of 2020 - it was actually Senator Bernie Sanders.
Forget everything you (think you) know about the March 2020 market crash - and by ”market” I am specifically and only referring to S&P500 index - and follow along step by step. This was a political-catalyst-triggered event that snowballed, and then avalanched into cascades of forced indiscriminate selling.
Below is an article I had written back in 2020. This was the very first market article I’ve ever written under Across The Spread - which I subsequently re-posted on the Real Vision Exchange when I was tapped to manage the platform (and thereby deleted the original Across The Spread blog).
Who cares anymore / why does this matter now?
Obviously the March ‘20 market move itself isn’t of current market relevance - but the broader and far more critical takeaway will never cease to be irrelevant:
Market narratives are no different from markets themselves - momentum begets momentum. Meaning- yes, it’s entirely possible for market consensus to ascribe incorrect explanations to major market moves. “The COVID market selloff” perhaps being the most egregious of our era.
So let’s revisit history: SPX in Feb-March 2020.
(Below written by Weston Nakamura in 2020)
COVID didn’t cause the Q1 bear market selloff- Bernie Sanders did
…by which I don’t mean Bernie Sanders himself personally shouting massive sized futures sell orders at his broker and breaking the market (amusing of an image as that is).
The March ‘20 global risk-off is accepted by consensus as an economic reaction to COVID. And while COVID obviously did hit single stocks & sectors hard and rightfully so (airlines, cruises, travel, leisure & hospitality etc), this is entirely different from what happened at the index level.
SPX’s fastest bear market sell-off in history was consequence of largely technical and structural factors: risk parity, short vol options positioning, passive index instruments’ asset concentration- all reversing/triggering one another to undergo a simultaneous and massive position unwind, with systematic and CTA flows fueling downside momentum, and doing so from an especially elevated level following a full quarter of corp buybacks + Fed repo liquidity that had been pushing markets upwards against an otherwise deteriorating macro backdrop.
These forces had long been in place- many of these factors were the same forces behind the Q4 ‘18 near-bear market downturn. And yes, there was also a ton of panic selling activity that was indeed purely motivated by the unprecedented economic uncertainty from COVID - that much is not up for debate.
The question is- what triggered the severe SPX index downside with such ferocity that a risk-off snowball had so swiftly and decisively transformed into an all-out SPX avalanche?
It was not COVID - it was Bernie Sanders.
“Why NOW?”
When the markets initially started seeing consecutive days of heavy volume selling- COVID was simply assigned and accepted as the catalyst. However, recall in those early days, some in financial media (who were also accepting, and spreading the “COVID-market” narrative) were asking “markets are plunging on COVID, but why now?”
COVID-19 after all was named as such because of its initial appearance in 2019. By Jan ‘20 when markets were hitting new highs, cases had already appeared in the western developed world, including the US for weeks on end- yet markets didn’t flinch. Even DAVOS came and went with no discussion of COVID & potential economic & market impact, yet the focus of the conference was energy sustainability.
Then one day, Italy confirms COVID- and THAT was the last first straw for the global markets community to suddenly agree to finally and collectively price in the economic implications of the virus?
From a market trading behavior perspective, seems highly illogical for the collective market participants to suddenly “agree upon” such ann arbitrary moment as the “breaking point,” and illogical it is.
At the index level, COVID has never actually impacted markets- neither to the downside nor the upside (very obviously not impacting markets to the upside – thanks to globally coordinated central bank QE bazookas firing off everywhere, markets have been one-directionally rallying nonstop right alongside the worsening global virus spread).
The President Sanders Risk
Remove COVID from the picture. Throughout 2019, if you asked US fund managers, and even non-US investors what the biggest market risk for 2020 was, the overwhelming majority would have answered the US election – meaning, the possibility of the corporate tax and regulation friendly Trump regime suddenly switching to a socialist, anti-free enterprise President Bernie Sanders dictatorship.
Among them, the contrarian minority who did not see the US election as the biggest 2020 market risk weren’t those who thought markets would be unaffected by a President Sanders, but rather, were those who felt Sanders was so far extreme-left that there’s no way such a radical candidate could stand a chance at winning vs Trump - and hence, markets are freaking out over a near zero-probability outcome. In fact, markets would sometimes get a bump higher as Sanders did better in polls, while moderate Democrat candidates split the electorate- as Dems’ internal squabbling further reinforced the perception of a Trump win locked in.
BUT- with implied vol so cheap (VIX with a 12-handle), a (then) record amount of SPX puts outstanding for March ‘20 quarterly expiry were opened to capture the early-March Super Tuesday primary results, just in case end-of-capitalism Sanders swept up a ton of delegates in March. This outsized SPX put positioning would later become one of the structural positioning forces that would contribute to the sharp downside, as well as the market’s v-reversal upon expiry of those March Sanders-hedging-puts.
Here is the exact chronology of what happened in late February to early March:
•Thurs Feb 20: At this point, COVID has already been a daily headline for nearly 2 months, now confirmed on every continent ex-Antarctica- 70k cases & 2,600 deaths globally have already occurred, and markets don’t care. Even the Davos elite were brushing it off as a non-market event, and instead remained focused on sustainable energy as the most pressing global topic.
And this is when the first cracks in the market begin to take shape.
CNBC intraday headlines from 2/20:
“11:33 am: Stocks keep going lower
The Dow’s losses are now greater than 300 points and it’s still not clear what is driving the move, other than possible technical analysis factors triggering quantitative selling. The Dow went from down 200 points to negative 370 points in the span of just a couple of minutes. Traders contacted by CNBC so far have no good reason behind the move. Big liquid name like Microsoft are falling with ‘MSFT’ now down more than 2%.”
“12:40 pm: Momentum stocks are leading the sudden sell-off
Momentum stocks collapsed on Thursday, leading the declines in the broad market, while their value counterpart held up amid the turmoil. The iShares Edge MSCI USA Momentum Factor ETF dropped 1.2%, and the iShares S&P 500 Value ETF dipped only 0.5%.”
The “no good reason behind the move” was Bernie Sanders gaining momentum among the 15+ Democratic candidates heading into Nevada caucuses that weekend.
(Note: later SEC filings would reveal Humana CFO sold $10mn of HUM stock options on Feb 21st ahead of Sanders’ potential strong primary win as polling indicated- healthcare stocks would take major hit under a Prez Sanders).
•Sat Feb 22: Sanders major win in Nevada caucuses taking 47% of delegates with large Latino vote support. Sanders now has doubled his delegate count in one day to 45, which is more than runner ups Biden + Buttigieg combined 41. Furthermore, new polling data now showed for the first time that Sanders would beat Trump in a head-to-head matchup.
•Mon Feb 24: For the first time ever, markets begin to seriously price in the possibility of a Sanders presidency: SPX drops -3.35%. Sanders presidency = end of private insurance industry, Centene Corp -9.4%, UnitedHealth Group (#2 weighting on Dow30) -7.8%, Humana -6.3% (nice trade from Fri, HUM CFO). This was a Sanders/Dem primary direct reaction sell off, the very nightmare risk scenario that had been long feared & hedged for – not ongoing COVID.
•Mon Feb 24 – Fri Feb 29: Bernie Sanders momentum continues, while moderate candidates split up the center-left vote. SPX has 5 consecutive down days losing -12% (-$7tn market cap) on the week by Friday’s close for fastest -10% correction on record. Technical/structural downside momentum forces awakened and at work..
After Nevada Primary win, Sanders has a commanding lead in delegate counts + polls favoring Sanders over Trump in head to head. Markets react to the real possibility of a Sanders presidency starting Mon 2/24.
***Major Turning Point Weekend: Biden↑, Sanders↓, Markets↑***
•Sat Feb 29: Biden wins big in South Carolina after key African-American endorsement.
•Sun Mar 1: Moderate front-runner Pete Buttigieg drops out & endorses Biden. Moderate Amy Klobuchar to follow in drop out & Biden endorsement 24hrs later.
•Mon March 2 (1 day before Super Tuesday): Biden suddenly revived with moderates no longer competing against, but coalescing behind. A major setback for Sanders’ momentum.
SPX surges +4.6% on the day, Dow sets record +1,290 point single day gain led by #2 weighted UNH +9% on Sanders Medicare for all pricing out (other health insurers: Anthem +13.6%, Humana +12.6%, Centene +12.3%, Cigna +9.2%).
Coronavirus Dem Primaries Triggered SPX sell-off
Note how initially, markets favored Sanders polling strength (aka Trump easy victory), until Sanders became too strong for comfort – prior to the March plunge, markets peak and already start to turn as Sanders surged. Biden’s recovery heading into / confirmed results following Super Tuesday each saw strong reversal rallies, but the market damage had been done.
Forget the clear & obvious timing of election events vs corresponding market reactions. If the previous week’s plunge had indeed been COVID driven, why in the hell would there ever be a sudden record upside reversal day arbitrarily thrown into the middle of the pandemic spreading? Did COVID take a long weekend day off from terrorizing markets on Mon ahead of Super Tuesday? Obviously no.
If markets were EVER driven by COVID, they would have paused upside in Jan, declined sharply in Feb, and remained down until current, rather than seeing the fastest bear and bull market on record throughout the ongoing pandemic.
SPX Selloff Loses Control
Though Biden eventually took the Dem nomination (and until a few days ago at DNC, had STILL been referred to as the “presumptive Dem nominee”), Sanders had a strong, grassroots backing to keep up the fight. The weekend of Biden’s revival, Sanders campaign raised a record $42mn in funding, far larger than all of Biden’s total war chest- hence Biden’s revival rally was short-lived.
Either way, it is now too much too late for markets to stabilize, as the furious sell momentum takes a life of its own with SPX in straight collapse from the second week of March - as the technical & structural auto-selling forces of the system were already in self perpetuating motion, and nothing that could be done to stop it. (That is- nothing except for those March puts to expire/disappear + a Fed QE-infinity announcement.)
See the eye watering intraday moves below:
3/9: SPX -7.6%
3/11: SPX -4.9%
3/12: SPX -9.5%
3/16: SPX -12%
These are not due to active human fund managers waking up each morning, checking to see if COVID still exists, and if so, selling off another chunk of their portfolio holdings incrementally day by day. In the real world of COVID, 3/12 was really no worse than 3/11 a day prior, despite an additional -10% drop in SPX. It’s not COVID fundamentals that are being reflected accordingly on a daily basis. What’s changing are price levels, strike price delta, limits, stop losses, margin calls, systematic risk management systems, liquidity needs, cross-asset reallocations (60/40 getting crushed). Its neck-breaking volatility - both realized and implied, at play.
VIX hit a record high 85.5 in March. High implied or realized vol doesn’t mean SPX ↓, it means insane swings in price levels to both directions - anti-stable markets. March saw SPX daily rise or fall by at least ±4% for 8 consecutive trading days, the longest such streak on record, some days seeing ±10% moves- truly historic.
Why this magnitude of vol and truly haywire markets this time? A perfect storm combination of the immense size of call overwriting and short vol strategies adopted by the yield starved long only community + outsized March expiry open interest + a volatility trigger (Sanders) + trading illiquidity + dealers short/long gamma flipping. And while Fed’s QE-unlimited announcement had coincided with a floor, it is also no coincidence that markets found bottom within a day of March quarterly expiry day on March 23rd, and once those positions had cleared away, had subsequently went on an equally historic one directional reversal rally off of Fed’s historic rescue. Market put replaced by Fed’s put.
Again, almost none of this price action is COVID related - be it the Bernie trigger to the structural self-feeding unwind. Which is why it’s so baffling to see so much of the focus being solely put on the COVID path, and being done so by the very market strategists who less than a few months ago could not stop talking about the Bernie election risk. Have they forgotten what their own stated risk scenario was as it was unfolding before their eyes? Apparently so.
Either way, blame Bernie for Feb/March- maybe not him personally, but blame the market players who reacted to Bernie, and definitely those who (still) have no idea that Bernie triggered the sharpest bear market on record.
Going forward, the big market risk is still the US elections (and still not COVID) – not necessarily who wins, but WHEN do they win. If/when election results are not officially called within 24-48 hours after polls close, that is uncertainty that’s never before been seen. And if the results are not clear a blowout win (and perhaps even still), regardless of who it is, the other side will not accept the results as legitimate, both Trump and Biden supporters alike (or anti Trump / anti Biden voters).
And while some do acknowledge this Trump/Biden outcome confirmation uncertainty, few are considering that this is not just about one elected position- what about all of the Congressional seats up for grabs? Does Mitch McConnell still hold his majority in the Senate, or does he even have a job at all? Will it be Pelosi & Schumer & Trump? Biden and Republican House & Senate?
Congress election results together with the presidency matter far more for markets than most realize. Keep in mind Nov 9 2016, Trump shock wins vs Hillary – which I remember clearly as I was trading Japan/Asia, the only region with markets open for trading as results came in (same for Brexit day - “vote results” always come out during Asia market hours). Candidate Trump takes 270 electoral votes, and NKY (which opened the day +2% on a “Hillary (will) win” sharply plunges -4% into cash close as the most uncertain of President-Elects had emerged. Less than an hour later, as Europe traders came in, USDJPY and eminis started ticking upwards, and before you know it, global markets are full risk on, stocks and bond yields surge. What the hell happened - why the bipolar flip? No, it wasn’t Trump’s victory speech that somehow soothed and then reversed markets to full-risk-on - it was the results from the Congressional seats still trickling in. And then it was revealed that the highly unknown-unknown of a Trump executivr branch would preside alongside a Republican controlled House AND Senate – uncertainty suddenly reversed to as certain as certainty could get.
That’s what reversed and ignited markets to full-risk-on on election day 2016 (and lasting for many weeks thereafter).
Now imagine that certainty rally in reverse. That’s what will come when we don’t even have a final count to determine which party controls the House and Senate, let alone the White House on election day 2020.
Post election volatility will not calm as per usual, but will elevate from pre election heights. 2020 election will likely not only not be a VIX sub 20 event, but will not be a sell-the-vol-event either.
(Written by Weston Nakamura, 2020)
And there you have it- my commentary from the sharpest SPX implosion in history, and what was behind it. Bernie. Not COVID.
Like I said, I’ve published / re-surfaced this article several times before - and yet I still always get pushback from some. And I can understand why- because this “COVID → market crusher” narrative has been so “factually” engrained in all of our heads (and I mean ALL of us- market participants to the highest levels of policymakers). And again, I am not saying there were zero sell orders that had a COVID motive behind it - of course those did exist. But that first leg of collapse in late Feb was US politics-pre-positioning and reaction driven, and any COVID flows after.
Either way, I am merely pointing out that this was absolutely not a single-driver (COVID) market, as per consensus belief to this very day - it was multiple drivers, and a major one of which was the long-held, much discussed, and instantly-forgotten consensus narrative: 2020 U.S. election risk.
And so I figured that for Super Tuesday 2024, a day in which markets are now re-focused on U.S. election risk without the “distraction” of a global pandemic, now would be the best chance to once again resurface this account of market history for the most open-minded reception to this “alternate” version of what happened.
The broader point here is just to illustrate how quickly narratives that attempt to explain market behavior can change, flip, or simply disappear - and perhaps more importantly - how widespread and unanimous narrative changes can be adopted. This is an example of a phenomenon that can apply to any market at any time. Yes, it’s entirely possible for the vast majority of the world to be on an entirely different “reality” - even ones that fly in the face of clear evidence.
This isn’t just a “don’t try to force-squeeze stories to fit green and red blinking tickers” message - this is a “acknowledge when the rest of the world is doing so” - as those are the rare moments of alpha grabbing opportunities.
And if this is all still nonsense to you, then perhaps you might find some “value” (by which I mean a thin slice of amusement) in this last COVID market chart I dug up from that era:
Correlation? Causation?
It’s a good piece in pointing out to be aware that what you think you know may be more of a hindrance than a help. I remember in 87 how everyone sat around for months waiting for the Great Depression redux to strike after the monster stock crash . Took a long time to recognize the impact of “portfolio insurance” on equity markets and how distorted markets had become. But at the time it felt like the end of the world as we knew it. Didn’t turn out to be quite that bad, at least in the US.
Ha! Any day 😃