In February 2020, US stocks were at record highs. Within about a month, a global pandemic had shut down much of the world economy, and markets suffered one of the fastest crashes in history. Then, just as surprisingly, they recovered to new highs within months. In Part 19 of Great Financial Crises, we look at the Covid crash.
A crisis from outside finance
Most crises in this series began inside the financial system: bubbles, bad loans or excessive leverage. The 2020 crash was different. It started with a health emergency. The new coronavirus spread from China across the world in early 2020, and governments ordered lockdowns, closed borders and shut businesses to slow it.
The crash
According to CNBC, the S&P 500 peaked on 19 February 2020 and bottomed on 23 March 2020, a fall of about 34% in just over a month. It was the fastest fall from a record high into a bear market in history.
Key days:
- On 9 March and 12 March, US markets fell so fast that automatic circuit breakers (introduced after Black Monday, Part 8) halted trading for 15 minutes.
- On 16 March 2020, the Dow fell about 12.9%, its second-largest percentage drop since World War II after Black Monday in 1987. The Nasdaq fell 12.3%, its largest percentage loss ever, and trading was halted again shortly after the open.
Oil prices also collapsed as demand vanished, with US oil futures briefly falling below zero in April 2020.
A dash for cash
As fear spread, investors sold almost everything to raise cash, including normally safe assets such as US Treasury bonds and gold. Even the Treasury market, the deepest in the world, showed signs of stress. Companies drew down credit lines, and short-term funding markets froze.
The response: bigger and faster than 2008
Central banks
On Sunday, 15 March 2020, the US Federal Reserve cut its policy rate to near zero and announced large purchases of Treasury and mortgage-backed securities. Over the following weeks, it launched a wide range of emergency programmes, including support for money market funds, corporate bonds and loans to businesses and local governments. Central banks around the world took similar steps.
Governments
In late March 2020, the US Congress passed the CARES Act, a stimulus package of about $2.2 trillion, including direct payments to households, expanded unemployment benefits and loans for small businesses. Other countries introduced wage subsidies, loans and guarantees.
The rebound
The scale of the response, along with hopes for vaccines and the rise of technology companies benefiting from remote work, helped markets recover remarkably quickly. According to CNBC, the S&P 500 was back to its previous highs by August 2020, only about six months after the peak.
The real economy took longer. US unemployment jumped to about 14.7% in April 2020, the highest since records began after World War II, before falling steadily.
The aftermath
The huge stimulus, supply chain disruptions and later energy price shocks contributed to high inflation in 2021 and 2022. Central banks then raised interest rates rapidly, which led to bond market losses and contributed to the banking turmoil of 2023 (Part 20).
Why it matters
The Covid crash showed how quickly markets can fall when uncertainty is extreme, and how powerful coordinated policy responses can be. It also raised debates about whether repeated rescues encourage risk-taking and inflate asset prices.
Lessons for investors today
- Shocks can come from anywhere, not just the financial system.
- Panic selling was costly. Investors who sold at the bottom missed one of the fastest recoveries in history.
- Keep an emergency fund. Having cash available prevents forced selling when markets crash.
- Policy responses can change outcomes, but may have side effects later, such as inflation.
In Part 20, the final instalment, we look at the 2023 banking turmoil and sum up lessons from all twenty crises.
Sources
- CNBC – One year ago stocks dropped 12% in a single day
- MPR News / NPR – Fed cuts interest rates to near zero (15 March 2020)
Great Financial Crises: the full series
- Part 1: Tulip Mania (1637)
- Part 2: The Mississippi and South Sea Bubbles (1720)
- Part 3: The Panic of 1907
- Part 4: The Wall Street Crash and Great Depression
- Part 5: Weimar Hyperinflation (1923)
- Part 6: The 1970s Oil Shocks and Stagflation
- Part 7: The Latin American Debt Crisis (1982)
- Part 8: Black Monday (1987)
- Part 9: Japan's Bubble and Lost Decades
- Part 10: The Savings and Loan Crisis
- Part 11: The Mexican Peso Crisis (1994)
- Part 12: The Asian Financial Crisis (1997)
- Part 13: Russia's Default and LTCM (1998)
- Part 14: The Dot-Com Bubble (2000)
- Part 15: Argentina's Collapse (2001)
- Part 16: The Global Financial Crisis (2008)
- Part 17: Iceland's Banking Collapse (2008)
- Part 18: The Eurozone Debt Crisis
- Part 19: The Covid Crash (2020) (you are here)
- Part 20: The 2023 Banking Turmoil
This series is for education only and is not investment advice. Figures are taken from the sources listed and other commonly cited historical records, and may vary slightly between sources.
