The JSE ALSI recovered more quickly than the major US and UK indices during the last two crashes.
The global economy was already on a fragile footing when a Black Swan appeared in January 2020 in the form of the coronavirus disease 2019 (COVID-19). The impact of the disease and the fallout from countermeasures has jolted financial markets to their foundations. South Africans – already in a fragile state from local economic challenges – were these past few weeks shaken by volatility in financial markets pummelling the value of their currency and pensions. However, this has happened before, and past experiences hold some valuable lessons.
What happened last week?
On Sunday, March 15, at the end of another tumultuous week of trading and global stock markets crashing on Monday, 9 March and Tuesday, 12 March, the South African rand traded at R16.36/$ – improving slightly from a 40-year low of R16.60/$ hit earlier in the week. After its worst day since 1997, the Johannesburg Stock Exchange (JSE) All Share Index (ALSI)) closed on Friday, 13 March, nearly 23.5% down from 19 February (the most recent high of major US stock indices) and dropped 25.1% from its highest level of 59,002 points on 17 January 2020.
Global markets weren’t spared either: closing on 19 February 2020 highs, the Dow Jones Industrial Average fell 21.00%, the NASDAQ Composite was down 19.79%, and the S&P 500 dropped 19.94% by market close on Friday, March 13.
Every stock market crash is driven by different factors; the latest mainly by the COVID-19 pandemic. On the back of corrections in asset prices after years of easy credit, the stock market decline started in late-February due to the increasing uncertainty around the potential negative impacts the pandemic would have on the global economy. The VIX CBOE Volatility Index – a global measurement of financial market volatility and uncertainty – started to rise markedly from February 19. The rising levels of uncertainty were then exacerbated by an oil price shock on Monday, March 6, with Brent crude dropping 25%.
At the time of writing, we are still in the midst of this global market crisis with no clear end in sight, paving the way for further panic and market volatility.
What is a stock market crash exactly?
While acknowledging this analysis as a point in time review, and differences in causal factors behind each historical market crash, we examine the two most significant of these crashes since the dawn of democracy in South Africa. By considering crashes with at least one 5% single-day decline and a drop of more than 10% in total, we look to gain insights into the recovery periods in the local macroeconomic context.
A stock market crash – short bursts of market downturns that often last as little as a single day, but can last much longer with numerous single day drops – is driven mainly by a crowd psychology of panic selling across a significant cross-section of a stock market. Market corrections occur over a longer period: when an index decreases by more than 10% from its most recent high over a period of months or even years.
When a decline continues to reach 20% from its most recent high, an index is said to be in a bear market. The most significant market crashes are therefore characterised by specific events but play out over a period of time – and could involve several single day crashes – that can last up to a few years from market peak (high) to market trough (bottom).
Since the stock market crash of 1987 (known as Black Monday) and including these past two weeks, the world experienced 18 noticeable stock market crashes and bear markets. However, since April 1994, when South Africa became a democracy and was welcomed back into the global economy, two major stock market crashes stand out: the dot-com bubble of 2000 and the Great Recession that followed the global financial crisis of 2008–2009.
The dot-com bubble of 2000
During the late 1990s, the value of equity markets grew exponentially, with the technology-dominated Nasdaq index rising from under 1,000 to more than 5,000 between the years 1995 and 2000. In 2001 and through 2002 the bubble burst, with equities entering a bear market. This led the NASDAQ index to fall almost 79% from a March 2000 peak to October 2002 (this period is highlighted in grey in figure 1).
In the graph below, we compare a number of key market indices from a base of 10 March 2000, when the NASDAQ was at its high. While the slip in the other indices did not occur for a few months following the NASDAQ’s tumble, most global stock markets took around four years to fully recover from the market low in October 2002.
The ALSI resisted losses and rose by 52.28% to an all-time high on 22 May 2002 (from 10 March 2000), but from that point, we observed a 37% decline through the global market low point (4 October 2002) to 25 April 2003. However, at this new low point, the ALSI was 4.1% lower than its pre-crash level on 10 March 2000.
Two weeks later though, on 7 May 2003, the ALSI was back at the pre-crash level. So, while the ALSI experienced a sharp rise and bear market during the market crash, it never dipped below its pre-crash level at all (the area highlighted in grey) — this only occurred afterwards for two weeks (highlighted in red).
The Great Recession of 2008–2009
On 9 October 2007, the Dow hit its pre-recession high and closed at 14 164.53 The subsequent market crash, triggered by the US subprime mortgage crisis, saw 11 separate days in which the S&P 500 dropped at least 5% in a single day. By 5 March 2009, it had dropped more than 50% (period highlighted in grey in figure 2). As with the 2000 crash, it took some of these global indices about four years after the Great Recession to recover.
However, we see the ALSI reaching its pre-crash level on 4 November 2010 — only 18 months after the market low, and after a year slightly below this level, the subsequent rise above the original base took hold from the end of October 2011 — 2.5 years on from the 5 March 2010 low cited above (period highlighted in red). The difference to the previous market crash is that, while the ZAR/USD exchange rate recovered to pre-crisis levels by October 2010, the currency gradually worsened from this point and has been continuing in this direction ever since.
The key takeaways are:
- Market crashes are not novel occurrences; they do happen, and so do market recoveries.
- With the current market uncertainty far from over, expect more volatility, but know that this is part of any recovery process.
- Based on our analysis, it seems that as soon as some form of a recovery takes shape, the allure of high yields draws investors with higher risk appetites to emerging markets like South Africa, contributing to a faster recovery compared to US and UK stock market indices.
Market recovery data summary
|Index||Approximate time to reach
dot-com pre-crash level (10 March 2000) from low point (4 Oct 2002)
|Approximate time to reach Great Recession pre-crash level (9 Oct 2007) from low point (5 March 2009)|
|JSE ALSI||None||18 months|
|S&P 500||4 years||4 years|
|FTSE 100||5 years||4 years|
|Dow Jones||14 months||4 years|
|NASDAQ||12 years and 6 months||1 year and 11 months|
Source: Capital IQ
Please note: This analysis does not consider any forward-looking elements to the JSE’s recovery. As such, we have not considered factors that would shape the recovery. These could include additional sovereign ratings downgrades in the near term, as an example.
Source: Capital IQ
Article by Lullu Krugel, Chief Economist PwC Strategy&, and Dr Christie Viljoen, Economist PwC Strategy&