Financial markets are settling into what’s becoming familiar territory of record highs on the first anniversary of the worst one-day decline in decades, underscoring the gap between Wall Street and the economy.
By the time the stock market closed on March 16, 2020 — the worst day of losses for the Dow Jones Industrial Average since Black Monday in 1987 — more than three years of gains had evaporated in barely a month.
The emergence of COVID-19 had thrown the stock market into rampant volatility well before the Dow closed on March 16 with a loss of 12.9 percent. Stocks had been falling rapidly, punctuated by fleeting rallies, since Feb. 10 as an outbreak of a viral respiratory infection exploded into a global pandemic.
The Dow would fall another 8 percent by March 23, the turning point of the coronavirus crash, and lost nearly 35 percent of its value before rebounding. Even so, it just took nine months for the Dow to recover to its pre-pandemic record, several months after the Nasdaq and S&P 500 index did the same.
In the year since the Dow’s worst day of the pandemic, stocks have soared through new record highs as the market cruises past an economy still reeling from the damage that Wall Street shook off successfully. All three major indexes have rallied well above their pre-pandemic levels in anticipation of the rebound from the coronavirus recession, thanks primarily to the trillions in monetary and fiscal aid deployed by the federal government.
“By early April, the financial markets had said, ‘OK, the sheriff’s in town, we’re OK,’” said Scott Clemons, chief investment strategist at Brown Brothers Harriman.
“[Federal Reserve Chairman] Jay Powell learned the lessons not only from Janet Yellen, but also Ben Bernanke, who, of course, presided over the global financial crisis, and learned them well.”
As the scale of the disruption and damage from COVID-19 was becoming apparent last year in the week before March 16, the global financial system spiraled into chaos not seen since the 2007-09 crisis that launched the Great Recession.
Stock fell sharply as investors fled the market, taking whatever gains they could after years of steady gains. While the freefall in stocks grabbed national attention, tumult in the Treasury bond market alarmed policymakers even more than the nosedive in equities.
U.S. Treasury bonds are traded like cash in the financial system, serving as the benchmark and collateral for trillions of dollars’ worth of trades. Underpinned by the idea that the U.S. will always be able to make good on its debts, investors consider Treasury bonds almost on par with the cash they promise to deliver.
But as the pandemic accelerated, the gulf between the purchase and sale prices for Treasury bonds offered by banks and investment firms increased drastically. The tumult in the Treasury market deepened concerns about a potential financial meltdown that could exacerbate the damage of the pandemic.
“The dislocations in the Treasury bond market were probably the most disturbing thing about the decline,” said Dan Alpert, managing partner at investment firm Westwood Capital.
“But the Fed stepped in and obviously very, very quickly rectified that.”
Powell announced on March 15, the evening before the Dow’s worst day of the pandemic, that the central bank would cut its baseline interest rate range to near-zero levels and begin purchasing billions in bonds to stave off a complete financial meltdown. The emergency Sunday announcement, following a weekend turmoil in options markets, marked a turning point in the U.S. response to the pandemic.
Investors pounced to cut their losses the following day as the enormity of damage on the way became clear. While the market rebounded strongly on March 17, it fell back into a nosedive soon after amid increasing turmoil in the bond market and daunting reports about the country’s preparedness for the pandemic.
But by March 23, the mood began to change.
Powell announced that day that the Fed would deploy a range of emergency lending facilities — some created during the Great Recession, others designed for COVID-19 — to make sure at least one institution would purchase a wide range of securities and bonds, unclogging frozen markets with the promise of trillions in purchases if necessary.
At the same time, the White House and lawmakers were making progress toward a more than $2 trillion pandemic response and economic relief, the largest single expenditure of rescue funding in U.S. history.
“The coming creation of the facilities … was enough to calm markets and then of course, in addition, we knew that Congress was working on stimulus of the fiscal variety, which is also very different than ‘08,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
Those factors, along with the unique nature of the crisis, helped spur the stock market to another record-breaking rally as investors sought to make their bets at the beginning of the road to the end of the pandemic.
The resurgence began with major technology companies that had done well before the pandemic started and were on the road to remarkable profits as a homebound nation turned to teleworking and electronics. As progress toward vaccines continued through the year, stocks in sectors hit hard by the pandemic began to catch up.
“You had the S&P hit a new all-time high, the Nasdaq had a new all-time high, which didn’t seem to make sense to a lot of investors given that economic data was still absolutely horrific, but leadership was unbelievably narrow,” Sonders said.
“It wasn’t until when we got the Pfizer vaccine news, which of course was followed by Moderna, that the market sort of left this narrow concentration and went into broader participation into energy into financials, and that was reflective of the light at the end of the tunnel.”
After taking nearly five years to recover its losses after the Great Recession, the stock market patched its pandemic hole in less than a year. Investment experts say the crucial difference was an unprecedented flood of aid passed in order to avoid another lagging recovery and the fact that the pandemic would in fact end one day.
Even so, the post-pandemic economy has been laden with risks for financial markets.
Questions about the values of commercial real estate, the future of U.S. offices, the recovery trajectory for hard-hit industries and the depth of household financial damage left to dig out of could dampen the exuberance that has driven stocks to new record highs.
“We have, clearly, a slow-moving train wreck across a number of different asset classes that would eventually affect public equities,” Alpert said.
“We’re in a situation that is very different from the financial crisis. Everybody can see the gray rhino that’s out there right in front of them.”