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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 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.
[caption id=”attachment_280171″ align=”alignnone” width=”1275″] Source: Bloomberg, as of 3/16/20. Z-score measures the standard deviation from the mean, which is represented by zero.[/caption]
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.
[caption id=”attachment_279435″ align=”alignnone” width=”867″] 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.[/caption]
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.
[caption id=”attachment_279446″ align=”alignnone” width=”854″] 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.[/caption]
[caption id=”attachment_279457″ align=”alignnone” width=”853″] 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.[/caption]
In addition, a more robust regulatory environment has left the largest U.S. banks better capitalized in the years since the GFC.
[caption id=”attachment_279468″ align=”alignnone” width=”859″] Source: Bloomberg, data as of 3/16/20.[/caption]
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.
[caption id=”attachment_279479″ align=”alignnone” width=”862″] Source: Bloomberg, data as of 3/16/20.[/caption]