What are the skeletons in the closet of the financial market? In other words, even if there is a miraculous sudden end to the virus, which problems will linger or have yet to be realized? Even if the U.S. manages to contain COVID-19, it's likely that the severity and speed of recent declines have caused some internal breakage. One obvious example is in credit markets, where indebted high-yield energy producers are reeling from the collapse in crude.
Another is Boeing: the disgraced plane-maker is now suffering a major demand pinch from a shutdown of the airline industry. It took nearly a year of Boeing's self-made crisis for volatility in the shares to finally signal concern, and the stock was a favorite among mutual fund managers and institutional investors alike for its seemingly impenetrable moat. Its epic collapse of more than 60% could have notably negative wealth effects if it does not turn around.
There other types of skeletons outside of positioning risk. Will we get another visit from the Repo Market Reaper? How many companies thriving off revenue growth will have their spigots closed if small businesses clamp down on costs or "zombie companies" stop walking? With markets now pricing in the worst economic event since the second-worst economic event in history, odds are on our side to surprise to the upside. But the hard questions are just beginning, and the scariest skeleton may end up being the bond market. With momentum trades dying left and right, it's likely a question of when, not if, the biggest one does too.
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