The Coronavirus and Expected Returns

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Hecato says, “cease to hope and you will cease to fear:”’... The primary cause of both these ills is that instead of adapting ourselves to present circumstances, we send out thoughts too far ahead.

The coronavirus (COVID-19) entered the global mainstream thinking in February when Iran and Italy reported large number of cases. Since then, country after country has announced lockdown measures. The thing about being in a lockdown with a constant barrage of news is that one quickly starts to imagine the worst. COVID-19 is a scary topic, especially because there is significant uncertainty around the primary variables around this pandemic.

But a rational assessment of the capital markets shows that much of the market decline was due to liquidation-driven selling. Indeed, prospective returns from quality business have greatly improved.

Performance of equity markets

The financial markets, driven by a panicked response, registered volatile price actions. The S&P 500 fell 30% within 30 trading days from its record highs reached on February 19th. As seen in Figure 1, this was the fastest drop of this magnitude in the recorded history of the index.

Figure 1: Speed of 30% Declines

Source: CNBC

The average stock in the S&P 500 registered a significantly larger decline. In Figure 2, the solid black line shows the performance of the S&P 500 index, while the dotted black line shows the performance of its equal-weighted counterpart. As is seen, the equal-weighted index registered a larger decline, falling 40%. European and emerging markets, measured in dollars, registered large declines as well.

Figure 2: Equity Market Declines from February 19, 2020

Source: Data from