Risk assets have nearly erased their coronavirus-induced losses, but several factors that accelerated their downfall remain.
The plunge from peak prices to bear market territory happened at record speed. The decline exhibited unprecedented risk velocity, or a heightened pace at which economic threats affect market valuations, Seema Shah, chief strategist at Principal Global Investors, said. But just as increased risk velocity drove prices lower at the start of the pandemic, the trend could drive a swift market recovery.
"Unlike the global financial crisis, or previous bear markets, the current crisis wasn't triggered by an unwinding of imbalances, central bank tightening, or high oil prices," Shah wrote in a note to clients. "This is an event-driven shock, and recovery should be less drawn out."
Markets' current levels reflect similar expectations for corporate profit growth. Several experts claim the rally is unsustainable, pointing to newly escalated US-China trade tensions and lofty unemployment figures as cause for concern. To determine whether such fears are warranted, Shah reflected on the risk-velocity factors she laid out at the start of the pandemic for clues on future market moves.
Here are the six risk-velocity factors that exacerbated the coronavirus sell-off, and how she expects them to either benefit or endanger risk assets' run-up.