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Market volatility and history’s recovery lessons

Daken Vanderburg

Posted on March 24, 2020

Daken Vanderburg is Head of Investments for Wealth Management at MassMutual.
Market volatility and history

This is the definition of a confused and unsettled market.

How? Well, take a look at the largest (up or down) returns of every single day for the Standard and Poor’s 500 (S&P 500) stock index over the past 10 years. That’s 2,518 days. Choose the 10 days with the largest moves. Of those top 10 largest market moves, eight of them have occurred in the past two weeks. Perhaps more telling, half of those days have been negative, and half of those days have been positive.

Volatility is high, and questions abound. Will the growth rate for COVID-19 slow? How much impact will the newly agreed upon fiscal stimulus provide? What will be the economic impact of the consumer slowdown? Are we in a recession yet? Is the Federal Reserve going to begin purchasing corporate bonds? Will the warmer temperatures slow the spread? Will Italy contain their contagion further?

The short answer is, we don’t know.

We monitor (and try to expand) that which we understand, we track and explore that which we don’t, and we try to use history as a possible light to guide us during the darkest times.

Therefore, what follows is an update on the novel coronavirus (COVID-19), as well as some historical views of:

1. How deep this current equity market sell-off is relative to others

2. What has historically occurred after those sell-offs.

As such, let’s begin with a quick update on the nature of the crisis. As of March 24:

  1. The novel coronavirus (COVID-19), now present on every continent except Antarctica, has infected nearly 418,000 people and killed more than 18,000 people. 1
  2. There are now more cases outside of China than inside China.
  3. In the United States, there are now a bit more than 44,000 cases along with 553 deaths, and the number of cases is growing at roughly 30 percent per day (which means we should expect a doubling of cases in a bit less than every three days).2

Yes, this is still vastly fewer than the total number of cases from the common flu every year (the World Health Organization estimates 45 million people were infected worldwide with somewhere between 300,000 and 550,000 deaths in the 2018 flu season), but left unchecked, the simple math means this will continue to get much worse.3 Fortunately, there are now many mitigating items (social distancing, mandatory work-from-home policies, quarantine, increase in testing kits, etc.,) that should make a material impact.

Regardless, Chart 1 demonstrates this more recent growth path for the COVID-19 outbreak. China is no longer the primary location of new cases (and has very few new cases), while European countries (Italy and Spain in particular), and the United States have become the epicenters.

Chart 1Understandably, investors are jittery. Volatility rises when uncertainty rises, and until there is a clearer path (both epidemiologically and economically), we are likely to continue to experience high levels of volatility.

Therefore, let us turn to history to help guide us through this period of uncertainty.

After all, haven’t capital markets experienced other periods with similar levels of hard-to-answer questions?

  • In 1918, we asked “when will the Spanish Flu end?”, “what impact will an estimated 50 million deaths have on the global economy?”
  • In the early 1940’s, we wondered “who will win the war?”, and “how will the result change a shifting world dynamic”?
  • In 1980, we worried “who could possibly stop runaway inflation?”
  • In 1987, we were surprised by Black Monday when markets lost more than 21 percent in a single day!
  • And in 2008, we were inundated by experts who questioned “whether capitalism would continue to exist?”

The next chart, perhaps, offers us a useful window into how sell-offs have historically been resolved.

chart 2

First, let us orient ourselves to what this is demonstrating. The orange bars are the significant peak to trough losses drawdown(DD) that occurred in the S&P 500 since 1920. The chart is, in fact, sorted by the size of those losses, with the smallest (1959) being at the left side, and the largest (1929) at the right side.

The orange bars are then paired with the subsequent 1-year, 3-year, and 5-year returns after the selloff ended.

A handful of important takeaways:

  1. The 2020 sell-off, while painful, and volatile, is roughly middle of the pack when compared with other historic sell-offs.
  2. There isn’t a single 1-year, 3-year, or 5-year subsequent return period that was negative.
  3. Historically, the rewards to those who endured the short-term pain were fairly dramatic (see bars on far right): the average drawdown was -33 percent, while the average 1-year subsequent return was +39 percent, the average 3-year subsequent return was 61 percent, and the average 5-year subsequent return was 109 percent.

So, while we can take much from this perspective, one clear signal is that we should generally not be making asset allocations decisions in the depths of the market turmoil. As we have seen, and will likely continue to see, markets are incredibly volatile, and we should not be focused on the noise of the moment to moment. The current moves are fast, they are confusing, they are often illogical, and in the short-term…they will be very hard to understand.

Lastly then, let us zoom out to the chart that offers perhaps the most important lens of all. Chart 3 shows us the total returns of investing in the S&P 500 since 1940.

chart 3

This chart demonstrates one of the most wonderful aspects of investing: markets recover. Black Monday in October 1987 was an unprecedented event as the U.S. stock markets fell almost 22 percent in a single day. The tech bubble crash of 1999/2000 was a remarkable destruction of value, and amid the Global Financial Crisis of 2008, pundits and commentators were speculating as to whether we had seen the end of capitalism as we had known it.

And yet, if we zoom out over the long term, equity markets are a remarkable provider of investment returns. This is the lens through which we should make our allocation decisions. During the darkest moments, we should remember why we made those decisions…and adhere to the plans created in those periods of less turmoil.

I do not know how much damage will be tallied when this is over, but I do know that capitalism creates incentives for investment and, over the long term, has rewarded those who can tolerate the short-term volatility.

In closing, stay safe, stay focused on what you can control, and please turn off the investment news channels.

For individual guidance and advice, contact your financial professional. Don't have one? Find one here.




1 Johns Hopkins University

2 (It is worth noting that this growth rate is the metric to watch as the world talks about “flattening the curve”. So, far the growth rate in cases in the United States has been remarkably consistent at between 30 percent and 35 percent per day.)


4 Sources: Bloomberg, World Health Organization

5 Sources: Bloomberg, World Health Organization (The S&P 500 is an equity index that consists of the stocks of 500 large U.S. companies measured by market capitalization. The results here include the effect of reinvested dividends. You cannot invest directly in an index.)

6 Source: Bloomberg

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.