In Charts: The Market Sell-Off in Perspective

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.

Key Takeaways

  • 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

Source: Bloomberg, as of 3/16/20. Z-score measures the standard deviation from the mean, which is represented by zero.

 

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

Source: Bloomberg. Black Monday data are from 10/19/87 – 10/19/90; the Global Financial Crisis data are from 10/15/08 – 10/15/11; and the Asian Financial Crisis data are from 10/27/97 – 10/26/00. Returns are indexed to 100. Past performance is not a guide to future performance.

 

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

Source: Bloomberg, as of 3/16/20. Leverage ratios measure a company’s total amount of debt relative to assets. The higher the ratio, the higher the degree of debt and, consequently, financial risk. Data based on companies in the S&P 500 Index.

 

U.S. Corporate Liquidity

Source: Bloomberg, as of 3/16/20. Current assets as a % of total assets represent assets that can be converted into cash quickly. Data based on companies in the S&P 500 Index.

 

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

Source: Bloomberg, data as of 3/16/20.

 

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

Source: Bloomberg, data as of 3/16/20.