Morningstar - Q2 2020 - 40

Spotlight: Market Crashes

Tracking the Coronavirus Crash
The exhibit below places the coronavirus stock
market sell-off into the context of the five
years,
most severe bear markets of the past
lined up together to show their duration
in months from their peak to when the market
returned to the same value. (We use the same
real return data from Exhibit .)

Naturally, there's a lot of variation in the length
and severity of each episode. These five market
crashes had an average of months between
when the decline began and when the market hit
months between when the decline
its trough,
began and when the market reached its previous
decline. And in addition
peak, and a .
to these episodes, there were also other bear
ea e iod e a ea
markets over the
markets have occurred roughly every nine years.

As market sell-offs go, the coronavirus crash
is serious-it roughly matches the initial sell-off
, which preceded the
during the Crash of
eat e e ion
o a
t e ma et ad
fallen . in real terms from its peak.

It's impossible to know how long this particular
decline will last and how long the recovery
will take, but these averages make it easier to
understand how many times the sky also seemed
years-frequently
to be falling over the past
for longer periods of time-and that the
market did always eventually recover its value,
and then some.

Besides the Great Depression, the other most
e e e e i ode in ude t e Vietnam and
inflationary bear market, the second half of the
Great Depression and World War II, the Lost
Decade of the dot-com bubble burst and
global financial crisis, and the World War I and
in uenza andemi do ntu n

i oa

en is Morningstar's editor-in-chief.

Peak-to-Recovery Real Returns in Five Most Severe Bear Markets and the Ongoing Coronavirus Crash
WWI and Inﬂuenza (06/1911-12/1924)
2nd Part of Great Depression,
WWII (02/1937-02/1945)
Coronavirus (through 03/31/2020)

Crash of 1929, 1st Part of
Great Depression (08/1929-11/1936)
Lost Decade (08/2000-05/2013)
Inﬂation and Vietnam (12/1972-06/1983)

Change
Since Peak
10%
0
-10
-20
-30

0
1
2
Duration (Years)

Sources: Kaplan et al. (
); Ibbotson (
o nin ta
e on a e edu
i e data tm ata a

i e t oetzmann I ot on and en

); Pierce (

);

13 YEARS, 6 MONTHS

12 YEARS, 9 MONTHS

10 YEARS, 6 MONTHS

8 YEARS

3 MONTHS

7 YEARS, 3 MONTHS

-40

-50

was. I call this the Pain Index. To measure the
Pain Index for each crash, I take the area between
the peak cumulative value line and the peakto-recovery line (the shaded areas in E X H I B I T 1 ).
I then divide this number by the area for the worst
crash, which, as of now, is the Crash of
/
Great Depression period. Therefore, the Crash of
a a ain Inde o
The Pain Index gives a perspective on how severe
each episode of decline was. It accounts for
not only the magnitude of the decline, but also
how long the decline took to unfold and how
long it took to recover. For example, the market
u e ed a . drop during the Cuban missile
. At
, the Great Depression
crisis in
at i ni ant
decline was . time eate
but based on the Pain Index, the Great Depression
crash was . times worse than the Cuban
missile crisis downturn.
e e doe t e u ent a an
o t i
Total Return
writing on March , the
Index's decline from its high on Feb. is . ,
which would rank it as the th-worst.
Oh, Canada!
a tu e a e not on ned to t e nited
States. To measure them, however, we need a
long time series of stock market returns.
ne ount o
i t e e i u a e ie i
Canada. A common stock market index
for Canada is the S&P/TSX Composite Index,
for which monthly total returns are available
. With data
going back to February
, we have more than
going through March
years of monthly returns. E X H I B I T 2 shows
, with full reinvesting
the growth of
, at
of dividends in the index through March
. Like E X H I B I T 1 ,
which point it is
it also displays a line that traces the market's
peak and to its subsequent recovery. The
gap displays the severity of the decline, which
we also measure with the Pain Index.

-60
-70
-80

The comparison between this market drop and the ones
o n in i it i not e a t e au e I eated i it
u in ea inﬂation ad u ted mont data
e ea e e
I am using nominal daily data.
e au e I did not a e mont inﬂation ate o anada
going back to February
, I used nominal returns.

Morningstar - Q2 2020

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