S&P 500 Market Moves (3/16/20)

Historical Context

On 3/16/20 the S&P closed down ~12% the second worst trading day on record behind Black Monday (10/19/87). Notably the S&P is exhibiting bottom ~1% trailing 1–90D performance and bottom 5% 120–180D performance and bottom 10% trailing 1 year performance.

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S&P 500 Historical Trailing Returns

Unprecedented Volatility

Since 2/24/20 there have been 16 trading days. 13 of them have exhibited either Bottom 1% performance (9) or Top 1% performance(4). The 9 bottom 1% trading days would be the 5th most for any given year let alone a 16 day trading period.

Market microstructure has evolved over time. As we continue to see significant inflows into both passive and quant vehicles, active managers have been marginalized as the incremental price setter; but instead are now price takers. The way in which these passive vehicles are structured (largely as cap weighted) selling begets more selling analogous to trading option gamma with minimal differentiation amongst the constituents. Quant funds / HFT firms are a much higher % of trading volume today than they were even 10 years ago which tends to exacerbate moves in both directions.

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Historical Volatility

VIX

The VIX is back to the highest level since the depths of the financial crisis. The number of derivative products created referencing the VIX since ’08 has exploded exponentially. This means an unwind of the short vol trade that was fairly consensus could and likely will be more extreme than last time.

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VIX Chart per: Koyfin

Forward Performance

We looked at bottom 1% trailing 10D, 20D, 30D, 60D, and 90D performance and subsequent forward performance over the next 10/20/30/60/90/360D. While short term the market is a mixed bag; largely predicated upon the magnitude of underperformance and of course the broader macro landscape the forward 1 year performance skews decidedly positive in an admittedly rather limited sample size.

Looking at the current “bands” of underperformance the average / median forward 360D performance for trailing 10D is 24% / 27.1% with 100% positivity (n = 5), 20D 27% / 27.6% with 100% positivity (n = 10), trailing 30D is 30.6% / 29.2% with 100% positivity (n = 15), and trailing 60D is 31.7% / 29.6% with 100% positivity (n = 75).

Valuation Support

Dating back to 1960 there have been 12 years where the S&P 500 saw earnings decrease YoY with an average / median decrease of -13.9% / -9.3%. While we haven’t seen a global shock quite like we are currently seeing with COVID-19, even during the depths of the financial crisis we saw earnings decrease ~40% YoY.

We shock 2019A EPS by 5–25% while ascribing trough multiples on the market which in a draconic state would point to an incremental ~10–20% downside from current levels. Assuming EPS only partially snaps back next year due to pent up demand and multiples re-rate we could see 30–40%+ upside from current levels or risk reward of 2–3:1 in the broader market which is incredibly rare.

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S&P 500 Sensitivity Table

Bottom Line:

When investing in the market we’re always dealing with a series of unknowns and the unknowns as it pertains to COVID-19, the duration, the economic impact, are incredibly difficult if not impossible to handicap. If you have a long term time horizon based on the magnitude of the move lower, and the fact that this should be temporary in nature pointing to fundamental support 12–24 months out, now is a great time to start buying public equities; as long as you’re comfortable with incremental risk / uncertainty over the next 1–2 quarters.

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