Comparing the Pandemic Rally to the Great Financial Crisis

COVID-19 created one of the more unique financial disasters in modern history: a deep recession brought on by pandemic lockdowns, crushing the usually stable services sector and necessitating a historic policy response. A truly singular crisis. But in other ways, this cycle is following the traditional playbook –panic and recession, followed by stabilization and skepticism, and culminating in a strong snap back fueled by optimism and economic recovery.

Some things couldn’t be more different, but some things never seem to change. On that note, we found this chart idea from our partners at Strategas eye-popping.

Though the selloffs were very different in 2008 and 2020, the recoveries have proven remarkably similar, all the way down to the ~65% gain nine months out from the lows. Both rallies were surprisingly strong, featured high volatility(including a few big selloffs), and, importantly, were not fully believed in by investors until months of gains had already gone by.

Though using a single data series to predict the future would be foolish, a few takeaways from this chart apply to our current recovery.

First, muted/mixed returns are normal on the heels of such a strong rally. 2021 looks likely to be a great year for both our economy and society as vaccinations unleash massive pent-up demand. Stock markets are forward-looking machines, however, and with the market at all-time highs, we wonder how much of this hoped-for boom has already been priced in.

Further, strong and sustained recoveries ultimately lead to a shift in sentiment. Though it took time, the pessimism and fear common in March have transformed into exuberance and optimism. Nearly every sentiment indicator we track (put/call data, investor surveys, fund flows, etc.) is flashing hot. This can often be a sign of near-term weakness. This moment in the 2009/10 recovery was followed by drawn-out period of higher volatility and sideways returns that tested investors’ mettle.

With that in mind, our message is simple: investors, particularly those who only recently bought back into the market, shouldn’t fear a near-term selloff. They can be gut-wrenching, but they are part of the investing process and are necessary for participation in the long-term gains of the stock market. Despite the volatility throughout much of 2010, the S&P 500 finished the year higher and kicked off one of the best decades ever for US stocks.