The impacts of the coronavirus on the global economy: Part VII The sectors of the stock markets

To what extend the outbreak of the coronavirus disease (the COVID-19) has affected investments in the various sectors of stock markets? To find this out, I have computed the year-to-date returns of two exchange-traded funds (ETF) that track the performance of the various sectors of the United States (US) and the global stock markets. The year-to-date return of a fund is the percentage change in its market value between the first trading day of the current year and the current date. The two ETFs that I am using to proxy the performance of the sectors of stock markets are: the select sector Standard and Poor's Depository Receipt (SPDR) funds and the iShares Standard and Poor's (S&P) global. The SPDR tracks the sectors within the S&P 500 (which consists of companies based in the US) and the iShares S&P global tracks the S&P global 1200 index (which consists of companies based in 31 countries).

Energy companies followed by the financial and the industrial companies turn out to be the three sectors that are most affected by the current crisis. In the US and the global markets, energy stocks lost respectively 41.6 % and 39.7 % of their values, between January 2 and April 27 (see the table below). This situation is explained by the dramatic drop in the price of the crude oil. As a matter of fact, over this time period, the spot price of a barrel of the West Texas Intermediate (WTI) crude oil fell from US$ 61.17 to $ 12.17 (which represents an 80.1 % decrease). The price of the Brent crude oil plunged from US$ 67.05 to $ 15.17 (which represents a 77.4 % decrease). On April 20, the WTI turned negative.

Table: Year-to-Date Returns of ETFs, Jan 2, 2020 - Apr 27, 2020.

Sector	Select Sector SPDR	iShares S&P Global
Consumer Discretionary	-9.90 %	-16.61 %
Consumer Staples	-5.76 %	-7.92 %
Energy	-41.61 %	-39.67 %
Financials	-27.67 %	-29.55 %
Health Care	-.54 %	.13 %
Industrials	-23.99 %	-24.05 %
Information Technology	-4.28 %	-5.48 %
Materials	-15.67 %	-18.18 %
Telecommunication Services	-4.45 %	-9.28 %
Utilities	-7.65 %	-9.54 %

The lockdown of economies and the layoffs that followed also considerably harmed the financial sector (personal, commercial, corporate and investment banking, transaction processing services, wealth management, …) and the industrial sector (manufacturers of capital goods, …) in the US and the other markets across the globe.

Health care (pharmaceuticals; health care providers, health care equipment and supplies, …) is the only sector that has recorded a capital gain, during this pandemic. The consumer staples, the information technology, and the telecommunication services are the three other sectors where investors incurred less losses. The reasons are that: (1) consumer staples (food, beverages, home and personal care, alcohol, and tobacco, …) are essential goods and services, (2) the services provided by information technology and telecommunication companies are ways of breaking isolation and loneliness during the lockdown. As an example, during the first quarter of this year, 15,8 million new people subscribed to the movie streaming services of Netflix.

Utilities, (gas, electricity and water distribution), which are known as a defensive sector, poorly performed, as many households waiting for employment insurance benefits had to postpone the payment of their bills.

The year-to-date returns of the select sector SPDR are similar to those obtained using such other major ETFs as the Vanguard and the Fidelity index funds that rather track the MSCI US index. Unlike stock markets, the year-to-date yields of bonds are positive. The year-to-date yield of the vanguard total bond market index fund is 3.92 % and that of the Fidelity total bond ETF is 2.03 %.

After plunging to 4.10 on April 10, the global financial turbulence score rose to 4.38 on April 17 (see the figure below). As I pointed out in my previous post [here], this means that the financial crisis caused by the outbreak of the coronavirus is not over yet. Unlike, the turbulence score, the VIX (the implied volatility index) keeps falling. It went down from 38.15 to 35.93, on April 17 (which represents a 5.8 % decrease). This means that despite the fact that volatility on stock markets starts rising again, investors are less pessimistic about the future.

Figure: Global Financial Turbulence Scores, Jan 8, 2000 - Apr 17, 2020.

Dataset and Code

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The Latest Global Financial Turbulence Scores.

Date	Score
Feb 14, 2020	1.36
Feb 21, 2020	6.23
Feb 28, 2020	3.68
Mar 6, 2020	9.74
Mar 13, 2020	12.89
Mar 20, 2020	9.37
Mar 27, 2020	8.03
Apr 3, 2020	7.70
Apr 10, 2020	4.10
Apr 17, 2020	4.38

The components indices of the global financial turbulence score

(1) NYA: the New York Stock Exchange composite index, (2) IXIC: the NASDAQ composite, (3) N225, the Tokyo Stock Exchange average index, (4) FTAS, the London Stock Exchange FTSE all share, (5) HSI, the Hong Kong Stock Exchange index, (6) N150, the Euronext Next 150 index, (7) GSPTSE, the Toronto Stock Exchange composite index, (8) BSESN, the Bombay Stock Exchange sensitive index, (9) GDAXI, the Frankfurt Stock Exchange performance index, (10) AXJO, the Australian Securities Exchange S&P 200, (11) SSMI, the SIX Swiss exchange mid-cap index, and (12) IBOVESPA, the Brazil Stock Exchange index.

Formula

$$d_t² = (r_t - μ ) Σ ^-1 (r_t - μ )',

where $d$ denotes the turbulence score, the vector $r$_t lists the current growth rates of the benchmark indices, the vector $$ μ their historical averages, and $$ Σ designates their variance-covariance matrix. For further details, see Mark Kritzman and Li Yuanzhen (2010).