2020 Midyear Outlook – Dog Years of Investing

Markets thus far in 2020 have been, to use an overused word, unprecedented. In a matter of months, we have witnessed economic and market moves that typically take an entire market cycle of many years to unfold. So, we truly do see 2020 as a year when investors are gaining “dog years” of experience.

From a backdrop of broadly aligned global growth, which culminated in market highs around February 20, we have seen a global shut down of economic activity in response to the COVID-19 pandemic. With that “man-made recession”, we saw uncertainty and volatility spiking into the market lows of March 23. Those lows ultimately coincided with the Federal Reserve (Fed) announcing a commitment to support the U.S. markets, in concert with monetary and fiscal policy actions around the world.

In our piece Epidemiology of the Markets, published on March 22, we framed the economic and market prospects as largely being driven by the COVID-19 pandemic, which continues to evolve in ways market participants and health care professionals alike have not anticipated. As we approach mid-July, the U.S. continues to set records for new cases, and discussions have pivoted from concerns about a second wave to describing the ongoing first wave as a “forest fire.”

Enthusiasm about the economy possibly regaining momentum has been muted by ongoing uncertainty regarding the public health risks of reopening. While volatility has retreated sharply from the record highs of late March (see Exhibit 1), it remains at elevated levels. Recent moves have shown that markets are likely to respond to changes in new COVID-19 cases, both positively and negatively.


Chart Showing Exhibit 1: Relative Returns vs. Russell 1000 Growth Index – March 23, 2020 to June 30, 2020

Source: Chicago Board Options Exchange (CBOE) Volatility Index. Data shows the historical measurement of expected market volatility based on the expected level of price fluctuation in the S&P 500 Index options from 2000 – July 10, 2020. The higher the value, the more the expected volatility. Past performance is not a guarantee of future results.

The S&P 500 Index fell by nearly 35% before making a low on March 23, almost exactly matching the fall during a typical recession. We believe this decline was indicative of the market pricing in a serious recession caused by the lockdown. In those prior cycles, the market took two to four years to recover whereas in this cycle we have seen a near full recovery in a matter of months, despite significantly depressed economic activity.


*Price return — does not include dividends. **Number of months assumes 30 days per month. ¹As of 03/23/2020. Source: Standard & Poor’s Corporation, Haver Analytics, Morningstar, Ivy Investments.