We’ve passed the one-year anniversary of the S&P 500 Index’s COVID-19 low on March 23, 2020 — and what a year it has been.1 Markets and individuals have gone through the gauntlet of emotions — from fear and uncertainty around the contagion of the COVID-19 virus and its impact on our daily lives to the current optimism provided by mass vaccination efforts.
Massive government intervention on a global scale, coupled with tremendous innovation from the health care sector, helped us avoid an all-out economic meltdown and facilitated the recovery and optimism.
But the worst global pandemic in over a century created a jaw-dropping list of implications:
- The United States experienced the worst quarterly drop in real GDP, an annualized 32.9 percent decline, in 74 years.
- Unemployment claims rocketed from 251,000 to 6.2 million in a matter of weeks.
- An unprecedented amount of stimulus from global central banks and governments helped to backstop the global economy and head off the worst of what could have been.
- In the United States, legislative action provided eviction protection and direct stimulus payments to consumers as well as paycheck protection programs to small businesses.
- The Federal Reserve stepped up its bond purchases to grow its portfolio by $2.7T, keeping the financial system lubricated and moving.
The selloff in equity markets and risk assets was swift and severe, but the ensuing rebound was just as staggering. Here’s a closer look.
Reviewing peak to trough
The S&P 500 Index declined more than 33 percent from its February 19, 2020 pre-COVID peak to its trough on March 23, 2020 — a remarkable decline in just 23 trading days. The selling during this period was widespread and indiscriminate as only four stocks — Clorox, Kroger, Gilead Sciences, and Regeneron Pharmaceuticals — posted positive returns. Energy, financials and industrials stocks were among the hardest hit in the index, with the sectors declining on average 46.5 percent.2
Oil, which had closed at $23.36 on March 23, would take nearly a month to experience its peak pain. As travel ground to a stop and large swaths of the global economy shut down, oil prices continued to decline, marking a nadir on April 20, 2020 at a -$40.32/barrel low.3
The yield on the 10-Year U.S. Treasury bond declined from 1.56 percent on February 19 to 0.38 percent on March 9 as the Fed delivered a surprise 50 basis point reduction in its benchmark discount rate earlier in the month.4
Investors were afforded little sanctuary from the asset price declines as the typical mutual fund holding intermediate-term bonds declined more than 3 percent over the period. Investors dealing in higher-yield corporate bond funds — funds that typically pay higher interest rates because they have lower credit ratings — realized equity like declines as the median fund declined more than 21 percent and the worst fund posted a worse than 55 percent decline.
One key anomaly during the sell-off was the relative outperformance of growth over value. Historically, value provides an element of protection during market selloffs. Small cap value was the worst place to be as the median fund declined more than 43.5 percent.
Off the Bottom
In less than five months, the S&P 500 Index eclipsed its February high on August 18 and has risen nearly 74 percent since March 23, 2020. During this time the energy, materials, and information technology sectors all returned more than 90 percent. Only 13 stocks realized negative return over the period while 36 stocks realized a return greater than 200 percent.
The price of a barrel of oil recovered sharply off the -$40.32 per barrel low to close recently at $61.55 per barrel as investors look to a post Covid-19 world where demand for the commodity is expected to recover as consumers start to travel and economies open up again.
The yield on the 10-year US Treasury is also well above the Covid-19 low as investors weigh the impact of the current round of stimulus against the backdrop of a rapidly improving economy on inflation expectations.
Investors will see some lofty returns as they open their statements at the end of this quarter. The vast majority of small cap funds currently have returns greater than 100 percent over the trailing 12-months (one small growth fund is up more than 339 percent) while large cap funds are by and large up a more “modest” 70 percent or more.
Growth continued to outperform value as a style for most of the trailing year. In the past few months, however, value has closed the gap as investors have turned attention to areas of the market levered to cyclicality and set to benefit from a post COVID reopening.
As we entered 2020, there were signs of an improving economy which supported the early gains in asset prices — an environment upended both quite rapidly and severely by the pandemic. Now a year later in 2021 with some asset prices at record levels — where do we go from here?
There are two main drivers:
- Tremendous amounts of stimulus and a Fed promising to keep interest rates low and monetary conditions easy provide support for asset prices.
- Mass vaccinations enabling an economic re-opening and lowering unemployment should provide further economic support.
These conditions, of course, provide the paradox of increasing inflation with the Fed desiring to hold rates low. A sustained increase in the 10-year U.S. Treasury bond yield could change investor risk appetite. Of course, inflation remained low throughout the 2010’s despite a prolonged economic expansion, low rates and full employment.
Expectations include increases in consumer spending and overall economic activity this year. With the amount of liquidity and potential pent-up demand, investors will need to monitor the risk of inflation and rising rates, particularly in pro-cyclical pockets of the economy.
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1The S&P 500 Index is a market-capitalization-weighted index of 500 of the largest publicly traded companies in the U.S. and is considered a proxy of the U.S. equity market. Past performance is not indicative of future results.
2 Source: Morningstar Direct as of March 18, 2021.
3 Source: MarketWatch as of March 18, 2021, https://www.marketwatch.com/investing/future/cl.1/download-data?startDate=3/23/2020&endDate=4/20/2020.
4 Source: Morningstar Direct as of March 18, 2021.