Markets In The Corona Virus Crisis

Mahmut Karayel
14 Mar 2020

MARKETS IN THE CORONA VIRUS CRISIS

In the past few days, several wise people who have seen multiple market crises stated that they’ve never seen anything like this. The housing crisis of 2008-2009 affected wealth and indirectly affected lives. This one may affect health and wealth. It is like a combination of the Polio panic of early 1950’s which ended with the discovery of a vaccine, and the financial panic of 2008-2009 which slowly ended then reversed itself with massive stimulus and quantitative easing, at least in the US.

The panic is simply due to not knowing the extent of the damage. The leaders should provide accurate and timely data, speak in full sentences and offer solutions that don’t confuse people. The extent of the damage is unknown; it can be ignored, as in much of January 2020, and subsequently exaggerated. But I don’t know, so who am I to say that it is exaggerated. The unknown can also work the other way. The wildest one-day rallies happened during these panic periods. We don’t know the impact of the remedy proposed by the leaders, and the impact of these can be exaggerated.

COMPARISON OF THE MARKETS DURING THE FIRST 75 DAYS OF THE TWO CRISES

I simply compared the market during the first 75 days of the 2008 housing crisis with what is happening now in the market. Hopefully 75 days is about enough time for people to regroup and start thinking calmly about what’s happening. We compared what would happen to a $10,000 market portfolio in both cases. The start for the financial crisis (FC) was September 15, 2008, failure of the Lehman Brothers. As the start of the "Corona Virus Reality" crisis (CV) we took February 25, 2020. Of course, there has not been 75 days of observations yet. We will update this blog and the statistics once a week going forward. So far, here is what we know:

Comparison of Two Black Swans
  • The volatility of the CV market is 79% which is indeed higher than that of the financial crisis (which was 68%). Compare these to the average annual volatility of 19% in this millennium. The average includes panic times as well as complacent times. For example, for 2019, a bull market, volatility was a mere 12.5%.
  • The three best performing days in the last 80 years all happened during these crises
    • March 13, 2020 up 9.3%
    • October 28, 2008 up 10.8%
    • October 13, 2008 up 11.6%
  • In the first 15 trading days in 2008 crisis the market portfolio lost 12.2% of its value.
  • In the first 15 trading days in 2020 crisis the market portfolio lost 18.8% of its value.

The good news is that vaccine research is fully under way. If this crisis ends with a vaccine, it will probably end much faster than the financial crisis which required years of massive quantitative easing. Hopefully we will not be social distancing for that long.

  • "The wildest one-day market rallies happened during the panic-stricken markets of the financial crisis and the corona virus crisis."
  • "We will update this blog and the statistics once a week going forward."

Suggested Data References in This Article (ALTADATA Marketplace)