Stock Markets and COVID-19: How will this play out?
We are living through historic days in the global financial markets. Everyone is trying to make sense of the news flow and potential consequences of the virus.
This blog was written March 19th 2020
The initial 20% fall of the S&P 500 took only 16 days to achieve. During the Wall Street Crash of 1929, it took twice as long. Also, starting on March 12th we saw three consecutive trading days where the absolute moves of the S&P 500 were above 9%, for the first time since 1929. Needless to say, the volatility during the last few weeks have been explosive.
The volatility during the last few weeks have been explosive
The VIX index, which is the most common metric for measuring the expected volatility of the US stock market, hit 82 on Monday exceeding the spike we saw during the Great Financial Crisis of ‘08/’09. As a comparison, the average VIX for 2019 was 13,8.
So, what’s going on and how do we expect this to play out?
Let’s take a step back and put recent events into context
During Q4 2018, the global equities market fell almost 20% from early October until Christmas Eve. Most market participants would blame central banks tightening and a growth scare for this downfall.
Many central banks - led by the US Federal Reserve – responded by cutting rates. The equity market reacted positively and 2019 saw MSCI World up 25% and S&P 500 up 29%. There were at least two clear observations from this rally: First, a lot of the performance during the year came from multiple expansion. For the S&P 500, for example, one estimates that 90% of the annual return came from multiple expansion alone. Secondly, in a low growth world with extremely low-interest rates, companies with growth strongly outperformed so-called value companies.
Anyway, 2020 started as 2019 ended – with a belief that the momentum should continue helped by easing trade tensions between the US and China and improving manufacturing data.