Crisis and Market Recovery

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Crisis and Market Recovery

The US stock market, which had operated at an approximately constant level of 3,300 points in 2020, suffered a sharp drop as of February 25, due to the Corona virus epidemic, having accumulated a loss of 29% in 19 trading sessions, until March 20. The only periods in the past 50-year history in which falls of this magnitude in such a small number of trading sessions were observed were the Black Monday of October 1987 and the Sub-Prime crisis of September 2008.

Such sudden variations in market performance take a long time to recover, as we will demonstrate in the study below.

Black Monday

In 1987, the performance of the North American stock market, measured by the quarterly average of the S&P 500, had been growing continuously, having reached an average of 319 points in the 3rd quarter of 1987.

On October 19 of that year, the market suffered a sharp and unexpected drop of 20% in a single day, the largest ever observed in history. Among the causes of this fall were the use of trading software and lack of liquidity, which fueled a vicious cycle of decline that day, with stocks continuing to decline, even as volumes became lower. Since then, circuit breakers have been implemented to prevent the repetition of Black Monday.

The S&P 500 average in the fourth quarter of 1987 was 256 points, 20% below the previous quarter. The index took 6 quarters to return to the same level as before Black Monday, having reached 314 points in the 2nd quarter of 1989.

The 9/11 Crisis

The early 2000s were a period of crisis in the US economy.

The market, measured by the S&P 500, had operated in the 4 quarters of 2000 at an average of 1,427 points. The average quarterly performance of the index, which had already been negative by 7.4% in the 4th quarter of 2000, declined by 6.8% and 3.1% in the first two quarters of 2001, respectively. The S&P 500 closed September 10, 2011, the eve of the attacks that culminated in the destruction of the World Trade Center in New York, at 1,093 points, a cumulative drop of 24% compared to the 3rd quarter of 2000.

In the 3rd and 4th quarters of 2001, the index fell by 6.5% and 3.3% respectively, with a slight recovery in the 1st quarter of 2002. In the following 4 quarters, though, there were successive falls, with the 1st quarter of 2003 registering an average of 853 points. On October 9, 2002, the S&P 500 reached its minimum value during this crisis at 777 points, the lowest level since 1997.

After a 42% drop for 10 successive quarters (with the exception of the 1st quarter of 2002), it took another 16 quarters for the S&P 500 to return to the levels of the year 2000. In the 1st quarter of 2007, the S&P 500 reached 1,424 points and maintained the average of 1,477 points that year.

The Sub-Prime Crisis

The initial date of the so-called Sub-Primes crisis is considered to be September 15, 2008, when the American bank Lehman Brothers collapsed. Although the market was operating at an average of 1,427 points in the previous four quarters, the S&P 500 showed its nervousness with a 9,1% drop in the in the 1st quarter of2008.

After the demise of Leman Brothers, the S&P 500 accumulated a drop of 41% between the 2nd quarter of 2008 and the 1st quarter of 2009, closing at an average of 808 points. On March 9, 2009, the index reached 677 points, the lowest value since September 1996, which was even lower than the lowest value of the 9/11 crisis.

After that fall, it took 15 quarters before, in the 4th quarter of 2012, the index returned to the level it had before the crisis.

Conclusion

It is not yet possible to predict whether, in the current crisis, the markets have hit bottom, or if we are still going to see further declines.

What history shows, however, is that recovering from a crisis of this magnitude will take a very long time.

This article was written by admin

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