How the Coronavirus Crash Is Different From the 2008 Financial Crisis

Are investors cashing out en masse?

Nick Maggiulli
Marker
Published in
5 min readMar 31, 2020

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Photo: Johannes Eisele/Getty Images

WWith the market now 30% off its all-time highs, the same question keeps crossing my mind: How will this crash compare to 2008?

Though the dust from our current crisis has far from settled, I am already seeing a few key differences in asset behavior that makes the coronavirus crash distinct from the 2008 financial crisis. Besides the speed of this decline, asset correlations don’t seem to be following their historical patterns.

For example, during normal times (i.e., times without panic), riskier assets usually have positive return correlations with each other (i.e., their prices move together), and less risky assets also have positive return correlations with each other. However, the risky assets and less risky assets generally show little to no return correlation with one another.

This pattern has been generally true for the past few decades.

We can visualize these correlations during normal times using a network plot where each circle is an asset class and the lines connecting the circles represent strong positive (greater than 0.5) or strong negative (less than -0.5) correlations in daily returns.

We will color the lines red when the correlations are positive and blue when they are negative, with thicker lines representing stronger correlations, meaning those closer to 1 or -1.

If we were to do this during a “normal” time period in markets (e.g., January 2014 to December 2017), it would look like this:

During this time period, there were no major market crises, and you can see that in the correlations. The risky assets (stocks and REITs) are positively correlated with each other and the less risky assets (bonds) are positively correlated with each other, but there is no strong relationship between the risky and less risky asset classes.

However, during times of panic, this changes drastically.

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Nick Maggiulli
Marker

Financial Blogger at OfDollarsAndData.com. Full Disclosure: Not investment advice. See OfDollarsAndData.com/Terms for full disclaimer.