The economic impact of Coronavirus


The market sell-off in March was extreme

The extent of the declines in markets during March represented the quickest and sharpest falls into a bear market investors have ever witnessed.

Whilst the absolute magnitudes of the declines so far are in line with many historical event-driven bear markets, the key differences this time has been the speed of decline.

Considering the US S&P 500 Index peaked the week of 17th February, it has only taken 16 trading sessions for the index to fall 20%, which is almost twice the speed of the prior fastest recorded crash of 1929 (see figure 1a.). Volatility has also been another differentiator with the VIX index (a measure of market volatility) recently hitting an all-time high, surpassing even the highs experienced through the 2007/08 financial crisis. Last week there were three consecutive days of moves +/- 9% in magnitude for the S&P 500 for the first time since 1929. 

Graph showing historical bear markets bar graph, created by Goldman Sachs Global Investment research, Bloomberg. It shows
A bar chart titled 'Number of days from peak -20% (commonly Bear Market) demonstrates the historical Bear markets and the number of days when it peaked to ~20% from the years 1929 to 2020. The graph is arranged in ascending order with the year 2020 having the least number of days of 22.
Graph showing market volatility has scaled to new highs at record space
Second graph showing volatility has scaled to new highs and at record pace in 2020
Two line charts titled 'Equity/Treasury/Curreny VIX Level (Part 1') and 'Equity/Treasury/Curreny VIX Level (Part 2)' compare Treasury Volatility, currency volatility and equity volatility from the year 2001 to 2020. The first time all 3 were highly volatile was in the year 2009, where treasury, currency and equity went up from 30.00 index level each to 80.00, with the second highest fluctuation occurring in 2020 when all three went up to 80.00 index points.

The sell-off has also seen some of the highest proportion of assets underperform cash on a monthly basis in over 30 years, and so this has also been particularly challenging for multi-asset portfolios given the lack of traditional diversification from defensive assets (Bonds, Gold and the Japanese Yen have not provided their historical correlation benefits so far during this event).

Investors have only experienced such a lack of diversification 13 other times considering data back to 1987. This has been triggered by the combination of an unexpected growth shock and a real yield shock, both additionally impacted by a sharp fall in energy prices which have destroyed what was a soft recovery of inflation expectations at the beginning of this year. The structural decline in inflation (and inflation volatility) of the past 30 years or more which also resulted in the decline in real yields, in turn had helped increase valuations across assets due to an intense search for yield1. Now with bond yields at all time lows there is little space for bonds to buffer further equity drawdowns as historically has been the case.

This chart shows the percentage of assets under performing cash from 1987 to 2019, the source BTIS, Bloomberg, Refinitiv. Based on available index data with 16 Asset Classes included from 2001 onwards.
Line chart titled 'Percentage of assets underperforming cash (1mth Horizon)' shows the percentage of assets that have been underperforming cash from the year 1987 to 2019. The assets have been fluctuating over the years, and in the year 2019, the fluctuation rate was 100%.
Chart number 1d, shows cross asset correlations are at prior risks off level in Bears markets
Line chart titled 'Cross asset correlations are at prior risk off levels' shows the average percentile of cross-asset correlations with S&P 500 in the Bear markets from the year 2001 to 2019. The percentile peaked in the year 2009, and then once again, in the year 2019 at around 0.8 percentile.

The depth of the market sell offs across all asset classes as at the end of March, is evident in the chart below. The degree of the market falls was felt even across even the defensive asset classes, being traditional Fixed Interest (Bonds). 

This charts displays the significance of the recent market sell-off, being on average over 25% for equity markets.
This charts displays the significance of the recent market sell-off, being on average over 25% for equity markets.
Line charts titled 'Asset class Returns to 31/03/2020 (Part 1)' and 'Asset class Returns to 31/03/2020 (Part 2)' demonstrates the returns of the major local and global Asset Classes over the periods 1 month out to 5 years. Over March we was equity markets fall between 10% (International Equities Unhedged) and 35% (Domestic Listed Property – AREITS), Whilst Fixed Interest Markets fell only between -0.1% (Australian Bonds) and -0.3% (International Bonds).

Global Central Banks and Governments have mobilised to prepare for expected downturn

A third of the global population including over 19 countries have now announced complete lockdowns including Australia, India, U.K., the majority of the European Union, New Zealand and Poland.

Many states in the U.S. have closed their borders so far with further increases expected2. Following restrictions on citizens, governments have mobilised growing aid packages with the latest indications the U.S. is to support a spending package in the magnitude of nearly USD 2 trillion to both individuals and corporates.

 The substantial fiscal aid packages have also been supplemented by slashing of cash rates and implementing of various forms of quantitative easing by Central Banks, including the RBA which has now guaranteed purchases for 3yr Bonds at 0.25%. The swift move in policy easing reflects the need to offset the significant and sharp deterioration in global financial conditions and activity.

This chart demonstrates the credit spreads over the period of 10yr US Treasury Yields, the period shown here is from 2001 to 2010,, showing BBA Spread, A Spread, AA Spread, AAA Spread and USGG10YR index
This chart demonstrates the credit spreads over the period of 10yr US Treasury Yields, the period shown here is from 2011 to 2020,, showing BBA Spread dropping to 5%, A Spread dropping to 4% , AA Spread, AAA Spread and USGG10YR index drops to1%
Area charts titled 'Credit Spreads over 10yr US Treasury Yields (Part 1)' and 'Credit Spreads over 10yr US Treasury Yields (Part 2)' demonstrate yields to maturity % p.a. from 2001 to 2020. The BAA spread fell from 8% in year 2001 to 5% in 2020; a spread falling to its lowest in 20 years to 4% in the year 2020. AA spread along with AAA spread fell from 7% in 2001 to about 3% in 2020. USGG10YR Index has also fallen to its lowest in 20 years from 5% to 1%.
This graph shows hows the financial conditions have detroritaed from the year 2010 to 2014, in UK, US and Euro-Zones. The data here shows it improved from 2010 to 2014
This graph shows hows the financial conditions have deteriorated from the year 2010 to 2020, the UK conditions fell from 0 to -2.5, US from 0 to -6 and Euro zone from 0.8 to -3.0
Two line charts titled 'Bloomberg Financial Conditions Indicators (Part 1)' and 'Bloomberg Financial Conditions Indicators (Part 2)' demonstrate the financial conditions of UK, US and Euro-Zone over the period 2010 to 2020. The US financial condition has seen index numbers falling to its lowest in year 2020 at 6.00. UK and Euro-Zone also suffered in the year 2020, with it index points going down -3.00.

The reason for such significant policy measures has been to combat the massive shut down in economic activity enforced by governments in an effort to curtail the spread of the virus. A global recession for the first half of 2020 is now a foregone conclusion with estimates of global GDP contracting by up to 12% annualised3 being the largest fall in quarterly global activity in near 50 years. Unemployment is tipped to double to near 10% in Australia and over 6% in the US. Given the speed of change it is not illogical to believe that economic activity could also re-accelerate in a similar fashion leading to a ‘V’ shaped event. The speed and type of recovery however is likely to be significantly correlated to the duration of the current outbreak and how quickly it can be contained. The policy measures now being implemented will help soften the impact to economies and financial markets in the coming months. Considering the experience of China, the epicentre of the current crisis, active infections are now near one-tenth of their peak level considered to have been in late February/ early March. High frequency data also provides anecdotal evidence that China’s economic activity is beginning to return to normal levels following the sharp reductions in quarter 1. Whilst the rest of the world is now contending with containment of a pandemic, there is some evidence to suggest if contained, a recovery this year remains firmly possible.

This chart shows China's coal consumption of 6 major power generators, blue line shows the downward trend for 2020 from 110 points to around 80
The line chart titled 'China coal consumption of 6 major power generators' demonstrates China's coal consumption behaviour since the COVID-19 outbreak. The graph shows that 15 days till lockdown China's consumption was at 110.0, and the consumption remained low from day 5 of lockdown up until day 25.
This chart shows the number of COVID-19 cases in China over a period of 17 Jan to 22 March which has fallen and share of global daily increase which also went down from 16 t0 0
The line chart titled 'China - Active infected cases' demonstrates China's active infected cases from 17 Jan 2020 to 22 March 2020. The graph also compares China's inclusion in active cases to daily global cases. China's active cases seem to be falling from 25 Feb 2020, to almost 0 in the month of March.

Portfolio Implications

This is indeed a unique and unprecedented event.

The pace of declines and speed in the shut down of economic activity globally has seen short-term uncertainty rise to extremes which has manifested in extreme price swings on financial assets.

The announcements seen by policy makers over the past two weeks will provide significant support in cushioning the down-turn currently underway but short term uncertainty remains elevated for the coming weeks.

For multi-asset investors a further challenge has been the level of indiscriminate selling in March, which has seen little protection from asset diversification.

Such dislocations however provide opportunities for long term investors to capitalise on.


For more information visit our dedicated COVID-19 page for Advisers or the ATO’s dedicated page at


1. Goldman Sachs – Portfolio Strategy Research GOAL publications
2. Barclays Global Research
3. JPMorgan Markets; ‘Implications of COVID-19 23/03/2020


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