2020 Has Seen More 3-Sigma Cross-Asset Moves Than 2008 – And It’s Only June

It’s no secret that 2020 has been a year defined by unprecedented developments in markets and previously unimaginable declines in economic activity across the globe.

Simply put, the first half of this year will be enshrined in economics textbooks, and not just for the once-in-a-century collapse. It is highly likely that 2020 will be remembered as the year during which monetary and fiscal policy became permanently joined at the hip.

For markets, the volatility witnessed in March was such that even those who remember all of the most harrowing episodes from the last three or four decades were taken aback.

Three months on from the panic, risk assets have recovered, emboldening a new breed of clueless speculator, whose defining characteristics include snapping up shares of bankrupt car rental companies and dabbling in the equity of various entities which either are, or will soon be, totally insolvent.

I personally doubt whether it makes sense to attribute any sizable percentage of the rally from the March lows to the Robinhood crowd, but the knock-on, second-order effects of their behavior may well explain some of the surge. The real driver, though, is Fed support.

Read more: The Fed? Robinhood? World Demands Answers For Increasingly Silly Stock Rally

In any case, Thursday was a wake up call for anyone who thought the volatility around the virus had abated for good. Retail day traders were likely aghast at the wipeout, and familiar dynamics served to perpetuate the losses as volatility surged (see the postmortem here).

“[Thursday’s] spike was the eighth largest one-day spike in VIX since the 1990s”, Morgan Stanley’s Andrew Sheets notes, adding that “even the moves out the vol curve have been substantial, with the third-largest daily rise in S&P 3m implied volatility since the early 2000s”. The moves pushed equity and credit vol back into the 95th percentile versus history, the bank writes. (I should note that I’m reluctant to cite that passage given that Morgan seems to be using the percentage move in the VIX, which isn’t generally the best way to conceptualize vol spikes, but it makes for good headlines.)

As noted previously, Thursday marked one of the largest one-day losses for the MSCI All Country World index on record. Obviously, March had a trio of worse days, but it’s notable that three months on, we had another anomalous “oops” moment.

On a cross-asset basis, Morgan Stanley notes that counting Thursday, 2020 has now witnessed more extreme moves across major classes than any other year going back to 1998.

The bank marvels at their own statistic: “…even though we are not halfway through the year yet”.

(Morgan Stanley)

Perhaps even more remarkable is the following figure, which shows that 2020 has already seen more 3-sigma, one-day moves across equities (relative to what was expected by markets the day before) than the financial crisis.

(Morgan Stanley)

Again, we are only in June.

And the virus second wave is just starting.

And the most contentious US general election in the nation’s history is a mere five months away.

And social unrest in America is running at a fever pitch the likes of which hasn’t been witnessed in five decades.

I don’t know about anybody else, but I can’t wait to see what those two visuals from Morgan Stanley look like by the end of December.