Stocks have come under extreme pressure amid the COVID-19 pandemic. However, during many past crises, equities have gone on to deliver double-digit returns in the years following the worst trading days. And unlike during the Global Financial Crisis (GFC), large corporations are not overloaded with debt.
- The COVID-19-driven equity sell-off has reached historic proportions over the last month.
- While sudden market swings are disconcerting, in the past, equities have often delivered an annualized double-digit gain over the three years following a crisis’ worst trading day.
- In addition, corporate balance sheets are stronger than they were in the lead-up to the GFC while the Federal Reserve has cut interest rates to zero and rapidly expanded its balance sheet to try to shore up the economy.
The COVID-19 coronavirus’ impact on markets has been historic. Over the past month, the speed and severity of the sell-off in U.S. equities has approached levels last seen during the Global Financial Crisis (GFC). Much of the decline is owed to the increasingly likely risk of a widespread recession in 2020.
One-Month Move in S&P 500® Index Over Past 50 Years
While sudden market swings are disconcerting, history shows that stocks can bounce back after significant disruptions. In fact, during many previous crises, the S&P 500 Index has gone on to deliver double-digit annualized returns over the three years following a period’s worst single-day loss.
Historical Equity Recoveries
The fast-moving pandemic is making near-term forecasting all but impossible. But heading into the crisis, U.S. corporations had relatively healthy balance sheets as measured by leverage ratios, which by the end of 2019 were well below levels seen in the lead-up to the GFC. Strong balance sheets could help companies ride out a global recession.
U.S. Corporate Balance Sheet Resilience
U.S. Corporate Liquidity
In addition, a more robust regulatory environment has left the largest U.S. banks better capitalized in the years since the GFC.
U.S. Banks Well Capitalized
Furthermore, to try to minimize the economic damage caused by COVID-19, the Federal Reserve has already slashed rates to a range of 0% to 0.25% and increased its balance sheet by more than 30% since the low in 2019.
Federal Reserve Total Assets
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