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COVID-19 and Sector Performance: Lessons from Past Crises

Global equity markets faltered in March but have recovered most of their losses since. In spite of this, institutional investors remain doubtful about the strength and the durability of the rally and have so far shown a lack of conviction.

The scepticism had already started at the beginning of the year when investors questioned where in the business cycle the global economy was. A variety of other factors exacerbated the scepticism, including the trade dispute between the US and China, the uncertainty over the upcoming US elections and the COVID-19 pandemic. For this reason, investors mostly stayed on the sidelines, which explains why the State Street Global Markets proprietary indicator shows that investor allocation to cash has remained at remarkably high levels.

All bear markets have different catalysts and no two crises are ever the same. Nevertheless, it is worthwhile to examine whether any lessons can be drawn from previous crises to inform the trajectory of the present (see Figure 1). To do this, we examined the four worst equity bear markets and performance turning points (peaks and troughs) and identified both the outperformers and underperformers, from the perspective of both performance and fundamentals.

Figure 1: Last four severe bear markets

Analysis of Past Crises

The main findings are:

  • Before market peak: Before reaching market peak, the Industrials sector demonstrated consistent outperformance during three out of four previous crises, up to 12 months before the peak (see Figure 2). This is somewhat surprising as conventional wisdom suggests that economically sensitive sectors, such as Industrials, have often rallied in anticipation of economic recovery.
  • Peak to trough: Once the market started floundering after the peak, Consumer Staples trumped all other sectors and delivered a consistent level of outperformance in all crises except for Black Monday. 
  • Trough to previous market peak: Immediately after the trough, Consumer Discretionary appears to be a winner across all four crises, as earnings improved quickly.

Figure 2: Performance in the run-up to market peak before the trough

What has worked so far?

In terms of sector performance, during the current sell-off, Information Technology, Health Care and Consumer Staples have outperformed the wider US market. At the same time, Financials, Energy and Industrials have been hit the hardest.

In this current crisis, Consumer Staples did not hold up as well it did in months following the peak, compared to past bear markets. On the other hand, Consumer Discretionary is one of the best performing sectors so far this year (see Figure 3). This may suggest that the market believes the worst is behind us because, in previous crises, it was Consumer Discretionary that outperformed most during the recovery period.

If history and past bear markets are any guide, investors who believe recovery is imminent should look more closely at Consumer Discretionary (despite the recent rally) and avoid defensive sectors. On the other hand, those investors who still feel that the worst is yet to come may want to consider Consumer Staples and Utilities.

Figure 3: Consumer Discretionary is trading in line with history