Any Happy Returns

Chapter 9The Pandemic and the Return of ‘Fat and Flat’

The magnitude and speed of collapse in activity … is unlike anything experienced in our lifetimes.

—Gita Gopinath

The economic shock of the pandemic generated a period of falling returns for equity investors (Exhibit 9.1). Markets recovered with the support of governments and the introduction of Covid vaccines.

Pandemic Pandemonium

The onset of the Covid‐19 pandemic ushered in the end of an era defined by disinflation, quantitative easing (QE) and record low interest rates, which caught policymakers and investors largely by surprise.

Exhibit 9.1 Pandemic heralds the return of ‘Fat and Flat’

NOTE: Shiller price/earnings (P/E) is a valuation measure. It is calculated by dividing the index price level by the average inflation‐adjusted 10‐year earnings per share (EPS).

SOURCE: Goldman Sachs Global Investment Research

The Pandemic Shock

The outbreak of Covid‐19 and the ensuing pandemic resulted in an abrupt halt to global economic activity and, with it, global equities entered a bear market in one of the fastest collapses in stock prices since World War II. The US equity market opened down 7% on 8 March 2020, triggering a circuit‐breaker for the first time since the financial crisis of 2007/08. Other equity markets followed suit, and the STOXX 600 index of the largest companies in Europe fell more than 20% below its ...