The 2020 Pandemic Market Crash in Historical Perspective
By: Robert Blake, PhD.
The COVID-19 Pandemic has already taken an enormous toll – both globally and in the US – on human lives, families, jobs, and businesses, not to mention government budgets. And, as market participants can readily attest, the broad-based drawdown in US asset markets during the early stages of the COVID-19 pandemic was also unprecedented in many ways. From its unique origins, to its rapid onset, to the extraordinary dislocations wreaked across a variety of markets (oil, credit, etc.), to the massive policy response, the 2020 pandemic crash – lasting roughly from the S&P500’s peak on February 19th to its trough on March 23rd – was undoubtedly one for the record books.
For investors, however, a key question is: how did this crash compare to past market downturns? After all, as we have noted previously, the US stock market has crashed on average every eight years over the past century. One way to answer this question is to look more broadly at market price behavior across a number of major asset classes likely to impact the portfolios of well-diversified investors. While this may limit the historical look-back period (given data limitations for some asset classes), it does allow for a more nuanced comparison and potentially richer insights.
Not so special?
Indeed, comparing this crash to the other eight episodes in FinMason’s historical scenario database [1] shows that – technically speaking – the 2020 crash registered neither the steepest rate of decline, nor the deepest cumulative drawdowns, nor the broadest impact seen in the past few decades (here we assume that we have seen the 2020 market lows). For example, during the 1987 crash, the S&P500 fell more than 20% in a single day and dropped a cumulative 28.5% over four consecutive sessions. By contrast, during the 2020 pandemic crash, the greatest single-day decline in the S&P500 was 12%, and the greatest cumulative four-day decline was 17.1%. Moreover, the crashes of 2000 and 2008 – which unfolded over many months, or even years – were certainly greater in magnitude than this year’s crash, with the S&P500 falling 47% and 55%, respectively, versus 34% for the 2020 crash. Finally, those two prior crash episodes were also broader, exhibiting bigger cumulative moves in foreign equities, US Treasury yields, and some other markets than seen in the 2020 crash, as will be seen below.
In one technical sense, however, the 2020 crash did break a record. Measured on a peak-to-trough basis (for the S&P500), the 2020 crash unfolded over the shortest number of days in our database, as shown in Figure 1, below. The S&P bottomed in just 33 calendar days before starting its recovery in March 2020, whereas the 1987 equity selloff dragged on for months, starting in late August and not bottoming out until early December. Even during the 1998 Russia/LTCM crisis – defining that episode in terms of the US equity market selloff, and excluding the extended Asian/EM selloff that began the prior year – the S&P500 took a total of 41 days to bottom out. At the other end of the spectrum, the 2000 technology selloff continued for 31 months until late 2002, extended by additional shocks, but nonetheless classified as a single episode in our database.
Figure 1. 2020 pandemic crash was the shortest
As also noted above, both the 2000 and 2008 crashes were characterized by deeper declines in the S&P500, as well as in foreign equities and US Treasury yields, as seen in Figures 2-4, below. To be sure, starting yield levels in many of these scenarios were much higher, so the 2020 decline in Treasury yields may correspond to a higher ranking if measured on a relative (percentage) basis.
Figure 2. But 2008 US equity market crash was still the biggest
Figure 3. 2020 crash ranks third among global equity market downturns
Figure 4. Yields fell by more in earlier crashes
However, it is important to note that the 2020 episode may not be over, so these comparisons should be considered tentative. This is particularly important in the case of Treasury yields, given ongoing speculation that the Fed may decide to reverse course and embark on a policy of negative official interest rates at some point in the future.
When it comes to credit markets and (even more so) oil prices, however, the 2020 crash clearly stood out from the pack. Measured by the spread between BBB and Treasury yields, credit markets exhibited their second greatest widening on record, only exceeded by that during the 2008 crisis, as seen in Figure 5, below. And with US oil prices dropping sharply from the low $50s into the teens—and briefly below zero, for technical reasons—there is no question that the 2020 crash in oil prices had no precedent.
Figure 5. 2020 crash stands out for oil and credit market dislocations
Rounding out our survey of price behavior across asset classes, Figure 6 demonstrates once again that the 2020 crash did not result in unprecedented moves in every market, with both gold and the US dollar logging changes that were fairly modest by the standards of past market downturns. While gold prices may be close to record highs, their volatility this year did not stand out, something that can also be said for the US dollar index versus advanced foreign economies, as seen in Figure 6. Once again, however, we must insert the caveat that this crisis may not yet be over, and there is always the possibility that future changes in US policy interest rates (or Treasury debt levels) precipitate further market adjustments that significantly impact the US dollar (or gold prices).
Figure 6. Gold and US dollar behavior this year did not stand out
For investors, these comparisons of recent market behavior in an historical context may provide lessons that prove useful for portfolio allocation decisions going forward.
[1] The FinMason historical scenario database catalogs market downturns across 16 factors in US & foreign equities, fixed income, credit, currencies, and commodities. Those episodes currently include the Crash of 1987, 1994 Fed rate hikes, the 1998 Russia/LTCM crisis, the extended bursting of the tech bubble starting in 2000, the 2008 crash, the 2010 Greek crisis, the 2015 Chinese market collapse, and the 2018 tariff wars. Not all historical scenarios in our database meet the conventional definition of an equity market crash (20%+ decline), but each was a significant market downturn usually – but not always – defined by an equity market selloff.