Researchers Examined The 2020 Market Crash, Here’s What They Found

On January 22, United Airlines was among the first firms to mention the potential risks from the coronavirus on an investor conference call. By mid-March, just seven weeks later, virtually all firms were talking about it.

The U.S. stock market saw one of its fastest declines on record in March 2020. The Dow Jones index experienced its second worst day ever, and the relatively newer VIX, a measure of volatility, hit an all-time peak. However, despite the bleak trend there were winners and losers with clear trends under the surface of the market chaos. Academic researchers are now starting to sift through the data, and unpick the details of how the crisis played out on stocks and broader markets.

Sector Trends

The biggest loser was oil, where the demand disruption due to the pandemic coincided with a price war. However, real estate, hospitality and entertainment were also hard hit. In contrast, the better performing sectors saw absolute gains even as the market fell, these included natural gas, food, healthcare and software. Poor performing stocks were also extremely volatile, with better performing stocks showing more price stability.

Stock Attributes

The sector trends are perhaps relatively well understood, researchers Wenzhi Din and colleagues in a National Bureau of Economic Research paper went beyond this to look at the attributes of better performing firms over the period. Predictably, those companies with stronger balance sheets, with more cash and less debt, fared better. As did those with less immediate pandemic impact on their supply chains. For example, companies with supply chains in China were initially harder hit.

However, as researchers from the University of Zurich have shown , the importance of different variables evolved over the course of the crisis. Initially those companies with weaker balance sheets with less cash and more debt, fared worse. However, after the Federal Reserve’s (Fed’s) announcement of broad liquidity on March 23 in the form of the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility, the trend shifted and companies with weaker balance sheets started to perform better once the support of the Fed was clear. Further support came a few days later as lawmakers passed the Cares Act.

Perhaps more unexpectedly, companies with better ESG scores and better governance processes, such as lack of provisions blocking takeovers, performed better over the period. Researcher Rui Albuquerque of Boston College together with colleagues reached a similar conclusion , finding that companies with superior environment and social traits showed better stock performance during the crisis.

Ownership Structure

Ownership structure mattered too. Those stocks with larger hedge fund ownership performed worse, perhaps because of the fast money and leverage associated with hedge funds leading to potentially more rapid selling. This was in contrast to stocks with steadier, non-financial ownership. Hence those companies with more stability in their investor base showed better performance, on average.

Country Traits

The aspects of a country where the company was based mattered too. Richer companies outperformed poorer countries, perhaps due to richer countries having greater resources to combat the pandemic. Secondly, populations with more people over 65 years old, did worse, likely due to the greater risk of those older populations to the virus itself.

The evolution of Covid-19, and the reactions to it, formed an extremely complex series of events both for financial markets and the real economy. Many of the trends documented by researchers confirm the intuitions of investors, such as sector trends and the importance of supply chain linkages. However, the decisive actions of the Fed do appear to have played an important role in stemming the crisis. It is also interesting, that ESG scores appear to have played a role in determining better performing firms through the crisis. The fact that a firm’s ownership structure can matter as much as the firm’s own characteristics is also a useful reminder that a firm’s investor base can impact its performance at times of market stress.

By Simon Moore, Senior Contributor