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).

The impacts of the coronavirus on the global economy: Part IV

Between March 20 and March 27, the global financial turbulence score dropped from 9.4 to 8, which represents a 14.3% decrease. At the same time, the implied volatility index, VIX, also fell from 65.54 to 57.08 (a 12.9% decrease). This means that stock markets across the globe have actually become less volatile and investors have started fearing less about the future. The major stock markets, except Bombay Stock Exchange, are recovering. Could this mean the global financial crisis caused by the outbreak of the COVID-19 is nearing an end? i do not think so and here are the reasons.

First, the levels of the global financial turbulence score and the VIX are still high. As it appears in Figure 1, they are above the red horizontal lines, which represent their expected values during high volatility periods. These expected values are respectively 3.4 and 27.8. Second, most benchmark indices are still, at least, 14% below their levels of February 14, 2020. For example, on May 27, the New York Stock Exchange (NYSE) composite index was 29.3% below its level of February 14, the Next 150 index was 31.6% below, and the Bovespa Index was 38.8% below. Third, stopping the spread of the COVID-19 has necessitated inducing a recession by closing borders and some businesses, which government are not yet ready to reopen.

Figure 1: Global Financial Turbulence Scores and VIX, Jan 8, 2000 - Mar 28, 2020

Are there signs of flight to safety?

Quite often, high uncertainty in financial markets leads investors seeking less risk to prefer government bonds to stocks. The move of investment funds out of stocks into bonds that follows is referred to as flight-to-safety. The current financial crisis has not triggered any flight to safety from stocks to bonds. The reason is that both bond yields and stock prices have been falling. The 13-week treasury bill rate went down from 1.54% on February 14 to .06% on April 2. In these conditions, acquiring bonds does not appear to be a safer alternative investment opportunity.

Figure 2: NYSE Composite Index and the 13-Week Treasury Bill Rate, Feb 14, 2020 - April 2, 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

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).

The impacts of the coronavirus on the global economy: Part III The Global Financial Turbulence Score and the VIX

I have taken another pulse of the stock markets by recalculating the global financial turbulence scores using the latest weekly benchmark indices and compared them to the VIX, a volatility index, published by the Chicago Board Options Exchange (CBOE). An option is a contract that gives its owner the right to buy (in the case of a call option) or to sell (in the case of a put option) an underlying asset (e.g., a stock) at a specified price and date. The CBOE is the world's largest options exchange. Figure 1, below, plots both the turbulence scores and the VIX. The VIX is also known fear index.

Figure 1: Global Financial Turbulence Scores and VIX, Jan 8, 2000 - Mar 21, 2020

The global financial turbulence score is backward-looking, as it is based on historical benchmark indices. On the other hand, the VIX is an implied volatility index, as it is the market expectation of the next 30-day fluctuations in the S&P 500 that results from solving numerically an option pricing model. While the VIX has the advantage of being forward-looking, it has the disadvantage of being derived from a theoretical model that might not always hold true empirically.

At the end of last week (i.e., on March 20), both the turbulence score and the fear index went down, respectively, from 12.9 to 9.4 and from 66.04 to 61.59. This means that, even if the global financial crisis caused by the outbreak of the COVID-19 is still going on, stock markets became less volatile and investors that were betting on the future evolution of stock prices by trading options also became somewhat less pessimistic. Since the outbreak of the COVID-19, the highest values of both the turbulence score and the fear index were recorded on March 13. (Recall that trading paused on March 9 and 12 on the New York Stock Exchange, as its benchmark S&P 500 plunged below the 7% threshold of the market-wide circuit breakers.) Both the turbulence score and the fear index date the on-going financial crisis back to February 21, where their values rose sharply, respectively, from 1.4 to 6.2 and from 17.08 to 40.11.

It appears in Figure 1 that there is a co--movement between the turbulence score and the fear index. In general, when stock markets are very turbulent, investors are also very pessimistic about the future. For example, during the 2007-08 financial crisis and the on-going health crisis, both time series reach a peak. However, during the oil price crash, the turbulence index quadrupled going from 2.74 to 11.57 on January 9, 2015, whereas the fear index only rose from 17.55 to 20.95 (which represents a 19.3% increase). On November 10, 2017, whereas the turbulence score was decreasing, the fear index rose. Figure 2 shows the scatter plot of both time series.

Figure 2: Scatter Plot of the Global Financial Turbulence Scores and the VIX, Jan 8, 2000 - Mar 21, 2020

The correlation coefficient between the turbulence score and the fear index is .64. However, as it appears in Figure 1, during quiet periods, the relationship between these two time series is not as strong as it is during turbulent periods.

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

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).