Why old market trends die hard

The extraordinary market moves in the first half of 2020 disrupted some of its most persistent trends, but Robert Donald and Ashley Lester explain why they won’t disappear so easily.

During the pandemic we have seen some extreme swings in stock markets. The longest bull-run in history, which started in March 2009, came to an abrupt end in early February when markets crashed in equally record-breaking fashion.  

The Dow Jones Industrial Average index of US stocks (‘the Dow’) fell by over 30% in only 25 trading days from 6 February. The shortest, sharpest correction in history. Even quicker than the crash in 1929, which preceeded the Great Depression.

As central banks and governments announced ever more extraordinary measures to protect jobs and the economy, stocks rebounded. By early June, US stocks had erased all their Covid-19 losses. Along the way some well-worn market trends also seemed to be reversing.

For instance, European stocks outperformed US stocks in mid-March. US small companies outperformed large ones in mid-April. And value outperformed growth in mid-May in the US. However, these reversal of trends were brief in their duration. We spoke to Ashley Lester, Head of Systematic Trading, and Robert Donald, Chief Investment officer at Helix, to find out which trends might be here to stay.

What has been going on in markets?

“Well, in US stock markets during March, cheap stocks underperformed by about 4.5 SDs and small stocks underperformed by about 6.5 SDs. “What that is telling you is that the size of moves in March were just truly earth-shatteringly enormous in terms of the relative valuation of these two types of stocks. “What we have seen since is maybe a bit of a comeback of cheaper stocks relative to more profitable stocks. But, I would not want to get too excited about it because they have got an awfully long way to go.” Why has growth outperformed value for so long?

“The snap-back in economic growth since the global financial crisis 10 years ago has been, relative to other recovery periods, more muted.

”What might the trend be going forward?