Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 352

COVID-19: Is this time really different?

It’s often said that history doesn’t repeat itself, but it often rhymes. However, seeing our schools shut, offices closed, and neighbours in masks surely can make one wonder, maybe 'this time is different.' We are at a watershed moment: the level of disruption across global industries, and the speed at which markets have upended, is truly unprecedented.

However, as different as it may seem, the response to the crisis feels all too familiar. Human behaviour is remarkably consistent over time, and one of those behaviours, panic, is just as contagious as any virus. But we can take solace in knowing that disciplined diversification and a systematic process can remove decisions rooted in panic and position investors to take advantage of potentially significant long-term opportunities.

Speed of the crisis

The speed at which the coronavirus has spread across the world has been a made-for-television moment. As the rate of contagion has accelerated, so too has the market’s reaction. We have seen one of the quickest falls into a bear market (defined as a greater than 20% decline) in US history, with the market plunging from an all-time high on 19 February 2020 into a bear market only 16 days later.

In prior crises like the dot-com bubble and the GFC, the bear markets came about much more gradually, over the course of half to a full year, as shown below in Figures 1 and 2.

Figure 1: Number of days from market peak to bear market

Source: Bloomberg, S&P 500 Index.

Figure 2: Market drawdowns

Source: Bloomberg, S&P 500 Index.

The level of disruption

During the GFC, investors were worried about the unraveling of the financial system and the potential for another Great Depression. But never during the GFC did people worry about their own physical health or that of their families. In fact, we would be hard-pressed to name a similar period of fear for one’s wellbeing for such a large segment of the global population since at least the second world war.

As a result of that fear we are witnessing unprecedented actions, including the complete shutdown of many industries within the global economy. Determining the full impact of this is little more than speculation, as there is no recent historical precedent and as the data points start to roll-in we will likely see numbers that would have been unthinkable a few weeks ago.

Why it’s not as different as we might think

It’s said that 'generals always fight the last war', and in our context it can be said that 'economists always fight the last recession', but it’s said for good reason. All crises - whether they be wars, depressions, or even pandemics - are inherently different from one another. However, people’s reaction to them is remarkably consistent, and there is no evidence to suggest that this has changed.

As the brain assesses a threat, it triggers a fight-or-flight response, anxiety rises, and logical processing and reasoning diminish. The infectious nature of the panic moves from individuals to crowds, which leads to herding behaviour. For example, even though grocery stores indicated no sign of supply disruptions, and governments made no threats of closures, panic buying of non-perishables and household goods soon became rampant.

The same behaviour applies to sell-offs and run-ups in financial markets. While repricing of assets is likely necessary in light of this crisis, many investors overreact as panic and indiscriminate selling spreads. This can be seen time and again throughout history as people respond out of fear, in the fog of ‘now’, undoubtably making mistakes that will later seem all too obvious in the clear skies of hindsight. Figure 3 shows how the market pushes valuations to excesses well above long-term averages, followed by falls to the other extremes.

Figure 3: S&P 500 Trailing Price/Earnings Ratio

Source: Bloomberg, S&P 500 Index.

Waiting for the all-clear sign

News headlines from 6 March 2009 were dominated by one of the worst monthly jobs reports in US history as 744,000 jobs were lost in a single month. On 9 March, only a few days later, the US equity market bottomed and began its recovery despite the backdrop of a recession raging on.

Historically, this is not an isolated incident. Over the last 80 years, the market has bottomed on average 107 days before the end of a recession. While we hear various estimates of time until the market bottoms, days until virus outbreaks peak and the length of the impending recession, there will not be an ‘all-clear’ sign for when the market starts to recover and it’s ‘okay’ for investors to jump back in.

This raises the importance of two time-tested investment pillars - diversification, and a systematic investment process.

Diversification

Diversification protects investors from overreaction as a balanced portfolio should mitigate some of the volatility and drawdowns. In good times, investors place increased value on future opportunities and earnings, as an overzealous fear of missing out drives their decisions leading to outperformance of more cyclical portions of the market.

However, during more turbulent times, investors put an increased value on certainty, focusing on fundamentals such as dividend income, and earnings stability. In fact, looking back over time, one can see the importance of income versus capital appreciation in times of uncertainty and lower economic growth, as shown in Figure 4.

Figure 4: Contribution of capital appreciation and dividend income within S&P 500 returns

Source: Bloomberg, S&P 500 Index.

Systematic investment process

While diversification attempts to protect portfolios from overreacting during periods of crisis, a systematic process attempts to protect portfolios from underreacting during one. While we are confident that markets will eventually find a bottom, determining when will be challenging. So, as the desire to sit on the sidelines grows, missing out on a small number of days in the market could have a significant impact on long-term returns, as shown in Figure 5. In fact, some of the best days in the market have often followed the worst. Taking the emotion out of investor behaviour will ensure investors take advantage of large price swings and increased volatility.

Figure 5: The risk of missing out on a few trading days

20-Year Annualised Rate of Return, as of March 26, 2020

Source: Bloomberg, S&P 500 Returns.

Conclusion

This time feels different, and that’s because, in some ways, it is. The speed and scale of this crisis is truly unprecedented. Nevertheless, investor reactions are and will be the same. Human behaviour is consistent through time, and like many crises past, people and markets will panic, leading many investors to overreact, creating enormous volatility but also significant opportunity.

We take comfort in our playbook, with diversification and a systematic process as the bedrock of our investment approach. Mitigating emotion, even in the best of times, is not easy. But our process is our guiding compass in these turbulent markets.

 

Michael LaBella, CFA, is Head of Global Equity Strategy at QS Investors. This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827), a sponsor of Firstlinks. The information in this article is of a general nature only. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

For more articles and papers from Legg Mason, please click here.

 

RELATED ARTICLES

COVID-19 and the madness of crowds

Are more informed investors prone to making poorer decisions?

Five strategies to match your investing to your behaviour

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.