Big Market Selloff? Stay Dynamic With Risk Positioning

As risk assets tumbled in late February and March, it intensified the focus on risk management: How can multi-asset strategies defend against turbulence while positioning for an eventual rebound? The answer: Be ready to adapt—and to do it quickly.

A Historically Rapid Equity Selloff

A decade-long bull market ended abruptly as markets wrestled to understand the impact that the tragic spread of the coronavirus (officially COVID-19) would have on the global economy. With a sizable buildup of long positioning, the dam broke quickly. At one point, global stock markets fell by over 25% in 16 days—the fastest drop of such magnitude in 55 years (Display).

The market downturn didn’t discriminate, taking many typical defensive exposures with it. Essentially, the entire risk market was reset, with nearly all correlations up. By mid-March, stocks had dropped to bear-market territory in about one-quarter of the time it took to reach that threshold during the global financial crisis (GFC).

Historical Perspective on Selloffs and Recoveries

The urge to de-risk is understandable, given the rapid, unrelenting selloff and the challenge in identifying solid ground for an eventual bottom. Taking some risk off the table makes sense, but history shows that down markets eventually regain lost ground—though the time frame is unique in each case.

In nearly 100 selloffs stretching back over a half century, fast selloffs have generally been followed by fast recoveries. In shallower selloffs—10% declines, for example—markets tended to return to a breakeven point or their previous peaks in about the same time it took them to reach bottom. So, if it took 50 days for a 10% selloff, it took the same 50 days for stocks to recoup those losses.