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The COVID Crash and Rally 2020

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The COVID Crash and Rally 2020

The COVID-19 market crash of February and March 2020 was unlike any previous financial crisis. It was not caused by a financial system flaw, credit excess, or speculative mania—it was caused by a pathogen. The global economy was voluntarily shutting itself down. Within 23 trading days, the S&P 500 fell 34 percent—the fastest bear market decline from a peak in recorded history. The VIX volatility index reached 82, exceeding the levels seen during the 2008 financial crisis.

The shock​

Global equity markets had been near all-time highs in mid-February 2020, with relatively little reaction to early COVID-19 reports from China. The escalation from concern to panic was extraordinarily rapid once it became clear that the virus was spreading in Europe and the United States. The S&P 500's 11-day decline from February 19 to March 9—a drop of roughly 19 percent—was the fastest such move from a record high in the index's history. Circuit breakers triggered multiple times.

The sell-off was not purely emotional. Economic logic justified pessimism: airlines, hotels, restaurants, and retail businesses faced near-zero revenue. Corporate bond spreads widened sharply. The municipal bond market—normally among the most placid in finance—experienced violent dislocations as states and cities faced collapsed tax revenues. The Treasury market itself, the deepest and most liquid in the world, experienced unusual volatility as hedge funds unwound leveraged positions.

The Fed's unprecedented response​

The Federal Reserve's response was faster and larger than anything in its history. Between March 3 and March 23, the Fed cut rates to zero in two emergency meetings, announced unlimited quantitative easing, established more than a dozen emergency lending facilities, and for the first time in its history agreed to purchase corporate bonds. Congress passed the CARES Act in March, providing $2.2 trillion in fiscal support. The combined monetary and fiscal response was estimated at over 25 percent of GDP.

The recovery that confounded expectations​

The S&P 500 bottomed on March 23—the same day the Fed announced unlimited QE—and began one of the most powerful recoveries in market history. By August 2020, the index had returned to its pre-crash high; by year-end, it was up 18 percent for the year. The Nasdaq, driven by technology companies that benefited from remote work and digital acceleration, rose 44 percent in 2020. The speed of the recovery, achieved even as the real economy continued to suffer, illustrated the power of the Fed put—the market's understanding that extreme monetary accommodation would be deployed in response to any severe market stress.

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