Stock market shocks: COVID-19 and lessons of the past

Does the recent V-shaped recovery of the S&P 500 suggest the worst of the COVID-19 crisis is over? Comparisons to past crises show this will not necessarily be the case. ·    During the Great Recession (2008–2009), the initial drop and recovery in the S&P 500 occurred more slowly than what we’ve seen since the COVID-19 pandemic began. A larger drop-off came nearly a year after the market peak of October 2007: Lehman Brothers didn’t collapse until September 2008. The post-Lehman recovery took much longer than the rebound we’ve seen in the past few weeks. Could a widespread resurgence of COVID-19 cases produce a "Lehman effect"? If so, another large drop-off is possible. ·    The Great Depression’s stock crash of 1929 was of the same magnitude as the drop-off spurred by the pandemic. A temporary recovery between November 1929 and April 1930 was mainly the result of “FOMO”—fear of missing out, which may be the case today too. From April 1930 onward, the S&P 500 suffered a turbulent, continued decline, partially due to increased protectionism fueled by the Smoot-Hawley Tariff Act. Import duties and retaliatory actions between trading partners strained the already weakened US economy, prolonging the decline for several years. Today, we could see more financial market turbulence and an extended bear market if geopolitical and economic conflicts deepen. As past crises have taught us, an initial stock market rally is no guarantee that we are out of the woods. The effectiveness of monetary and fiscal stimulus will only become clearer in the coming months. New stock market shocks, stemming from the pandemic or geopolitical tensions, could cause a return to volatility and new declines.