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Dimitris Melas

Dimitris Melas
Managing Director, MSCI Research

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Coronavirus and oil hit equities — how low can we go?

  • The market turmoil sparked by the coronavirus pandemic is reminiscent of market conditions after the terror attacks in 2001 and the onset of the global financial crisis in 2008.
  • In the two previous extreme events, the equity market continued to decline over the following six to 12 months, suffering total drawdown in excess of 50%. Also, in both 2001 and 2008, volatility continued to rise after the initial shock, peaking a few months before the market bottom.
  • So far, the COVID-19 pandemic and oil-price collapse have led to a near 20% drawdown in equity markets and a spike in forecast volatility to over 40%. It remains to be seen whether the current crisis will follow a pattern similar to those of the past.

On Monday, March 9, 2020, global equity markets fell sharply, reflecting growing fears that the spread of the novel coronavirus and the slump in oil prices may tip the world economy into recession. We’ve only experienced two other similarly severe economic and market shocks in the last 20 years: the terror attacks in September 2001 (9/11) and the near collapse of the global financial system in September 2008 (the global financial crisis or GFC).

 

Dissecting previous severe events

Here, we use the MSCI USA Index to examine market performance and MSCI’s Barra US Total Market Equity Trading Model (USFAST) to analyze market volatility during these three extreme economic and market shocks. We observe that in the previous two shocks, the equity market continued to decline over the following six to 12 months, suffering total drawdown in excess of 50%. Then it took between three to five years for equity markets to reach their previous peak. Interestingly, in both 2001 and 2008, volatility continued to rise after the initial shock, peaking a few months before the market bottom, and fell in the subsequent years, reaching a trough a few months before the market top.

 

The fall and rise of the equity market during extreme times

In 2001 equities were already roiling from the burst of the tech bubble. Following the terror attacks of 9/11, the equity market continued to fall and experienced maximum drawdown of 52% one year later in October 2002. The market regained its previous peak five years later in July 2007, delivering a total return of 105% during this period.

Following the collapse of systemically important financial institutions in 2008, the equity market also continued to decline in the months after, experiencing a maximum drawdown of 56% six months later in March 2009. It then took more than three years for the market to reach its previous high in September 2012, producing a return of 132% during this period.

 

Historical drawdowns in US equities

Click and drag on the bottom sub-chart to zoom in on any period. Hover over any data point below to see its value.

 

MSCI USA Price Index in USD from June 30, 1995, through March 10, 2020.

 

Forecast volatility led market performance in previous crises

Equity-market volatility, as forecasted by the MSCI USFAST model, jumped to 32% when markets opened following the attacks of 9/11, peaking at 36% in August 2002, two months before the October 2002 market trough. Volatility reached a low of 7.6% in February 2007, six months before the market peak in July of that year.

Volatility in equity markets followed a similar pattern during the GFC, jumping to 47% in September 2008 and peaking at 81% in November of the same year, three months before the market low in March 2009. Volatility then declined throughout the 2010s and reached a low of 6.0% in January 2018 before the “Volmaggedon” of February 2018. By way of comparison, volatility was only at 10.5% in February 2020.

 

MSCI’s Barra US model predicted risk

Click and drag on the bottom sub-chart to zoom in on any period. Hover over any data point below to see its value.

 

MSCI US Total Market Model (USTMM) from June 30, 1995, through March 10, 2020.

During the last two severe shocks, of 9/11 and the GFC, equity markets slumped for several months after the initial shock, leading to a maximum drawdown of just over 50%, and forecast volatility led market performance at turning points. So far, the COVID-19 pandemic and oil-price collapse have led to a near 20% drawdown in equity markets. And at the time of writing (March 11, 2020), markets were trying to regain their footing, encouraged by interest-rate cuts, as well as tax cuts and other direct measures of fiscal intervention announced by authorities. It remains to be seen whether the current crisis will follow a pattern similar to those of the past.

 

 

The author thanks Roman Kouzmenko for his contribution to this blog post.

 

 

Further Reading

Coronavirus impacts on the market page

Regulation