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The COVID-19 market sell-off: 1 year later

Here are the key lessons learned from one of the most significant sell-offs in history


Our Top Market Takeaways for March 26, 2021.

Market roundup

Scared yet?

 

The S&P 500 is down -1.6% since making an all-time high after the Fed’s release of its economic projections on March 17.

Since then, only healthcare and the safe-haven sectors of utilities and consumer staples have gained. Energy, consumer discretionary and technology have led to the downside.

The Russell 2000 Small Cap Index is down -7.5% from its all-time high set a day before. Hong Kong’s Hang Seng Index is in correction territory, and onshore Chinese equities have fallen -15%. The NASDAQ 100 is more than -7% below all-time highs.

The U.S. dollar has gained against every G10 currency, save for the safe-haven yen. Growth-sensitive currencies such as the New Zealand and Australian dollars and the Norwegian krone are leading to the downside.

Growth-sensitive commodities such as crude oil (-11% from highs) and copper (-7%) have lost momentum. 

This is all happening even though the big risk factor of the past several weeks, inexorably rising interest rates, has reversed. Bond yields are lower across the curve, and yield curves have flattened.

COVID-19 cases are rising across many states in the Northeast and Midwest. Europe is struggling with more lockdowns and missteps in its vaccination programs. Weather-disrupted or not, the economic data from February was weak, and a giant ship running aground in the Suez Canal is an on-the-nose reminder that supply chain issues are pinching businesses and pressuring producer prices. Media attention is already starting to turn toward tax hikes that might accompany any infrastructure bill from Congress.

Scared yet? Should we expect more downside in the near term?

Perhaps. But as we discuss further below, the average year sees a peak-to-trough drawdown of more than -14% in the S&P 500 (the largest we have seen so far this year was almost -6%). A sell-off of that magnitude for any of the reasons above would probably be a good buying opportunity. 

High yield spreads have barely budged. Vaccination progress is accelerating in the United States. Stimulus checks are just starting to get spent on goods and services (not stock options). Household balance sheets have never been stronger. Earnings expectations are rising. We still expect stock markets to be higher in 12 months than they are now, even if we get a few sell-offs along the way.   

The market may be gearing up for a risk-off period ahead. Or it could just be tired; low conviction; looking for the next trade. Only time will tell.

But for now, one year after the market’s COVID-19 crisis bottom, it’s worth reflecting on what the past 12 months taught us about navigating the ups and downs.

 

One year later

Lessons learned from the virus crisis

 

There are many lessons that can be drawn from the past 12 months, but there are three things in particular that we should carry with us throughout our investment lifetimes.

1. Volatility is normal: Markets reward investors who stick to their plans.

The S&P 500 has suffered pullbacks of -10% or more in 22 of the past 40 years (with an overall average intra-year drop of more than -14%). Despite the usual dips (and sometimes dives), the index still managed to muster a positive return in 31 of the 40 years.

The COVID-19 crisis is a hyperbolic example of that trend. The drawdown of -34% was notable for being the quickest and one of the most significant sell-offs in history, and 2020’s overall +16.3% return was well above the average +10.3% calendar year return. Consider it a reminder to avoid making rash decisions when markets get bumpy.

 

2. Timing the market is risky business: Missing a few good days can undermine investment returns.

An investor who put money to work in the S&P 500 at the start of 2020 and stayed fully invested up to now would have gained +19% on their investment…not a bad reward for sticking it out even on those days that saw markets plummet as much as -12%.

Here’s the real kicker: Over this period, the 10 best days for the market all happened within one week of one of the 10 worst days. What’s more, the 10 best days for the S&P 500 since the start of 2020 all happened between March and early April of last year—a period during which volatility spiked to its highest level on record. If an investor got spooked and ended up missing those 10 best days because they sold their stocks and went to cash, the consequences were quite meaningful.

 

3. Optimism is not a weakness: Markets have a tendency to recover before the economy does.

Asset performance doesn’t reflect whether things in the macro backdrop are “good” or bad,” it reflects whether investors think things are going to get “better” or “worse.” The pandemic provided a perfect example.

The stock market bottomed before COVID-19 cases hit their peak, before the unemployment rate spiked, and before economic growth bottomed out. That’s because investors had come to expect a few different things: 1) that the rapid policy response from central banks and governments could stave off the worst-case economic fallout scenario; 2) that the pain would start to pass and a recovery would begin; and 3) that certain companies could actually thrive in the pandemic era thanks to their exposure to the digitally enabled parts of consumption, socialization and work.

The takeaway? Markets are always focused on the future, and the future has a way of turning out better than the present. It typically pays to be an optimist and focus on the longer-term potential.

 

 

 

 

All market and economic data as of March 2021 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice

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  • The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
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