COVID-19 Ghost, Volatility Trends, and Seasonality: Market Takeaways

The COVID-19 pandemic left an indelible mark on global financial markets, and its ghost continues to haunt investors as they navigate the current landscape of volatility and seasonality. The pandemic's impact on market volatility trends was profound, with unprecedented increases in conditional volatilities and bad state probabilities across all markets. This period of heightened uncertainty offers valuable lessons for investors seeking to optimize their strategies in the face of future market disruptions.



The pandemic's influence on market volatility was not uniform across all markets. For instance, the United States, Italy, Spain, United Kingdom, Germany, China, Brazil, Russia, and India experienced significant disruptions due to the virus. The study utilized an asymmetric exponential generalized autoregressive conditional heteroscedasticity (EGARCH) model to capture the asymmetric effect of positive and negative shocks on conditional volatility, finding that "the negative affect of deaths is more pronounced, compared to the positive impact of recovered cases." This asymmetric impact underscores the importance of understanding how different types of shocks can influence market volatility.

The pandemic also highlighted the interconnectedness of financial systems and the potential for rapid and severe market reactions to unexpected events. The "domino effect" created by retrenched investors in many countries resulted in "unprecedented disturbing effects in different economies that were only comparable to the depression of 1920." This contagion effect in the global market underscores the importance of diversification across different markets and asset classes to mitigate the risk of severe market disruptions.

Investors can learn several lessons from this period to navigate future market uncertainties. Firstly, it is crucial to understand the asymmetric impact of positive and negative shocks on market volatility. As the study found, "positive shocks may have less impact on volatility than the negative shocks," which means that investors should be prepared for more significant market reactions to negative news. Secondly, diversification across different markets and asset classes can help mitigate the risk of severe market disruptions. The pandemic's impact on various economies and markets underscores the importance of a well-diversified portfolio. Lastly, investors should be aware of the potential for rapid and severe market reactions to unexpected events, such as a global health crisis, and be prepared to adjust their investment strategies accordingly.

In addition to the lingering effects of the pandemic, current market volatility is driven by a range of factors, including tariffs, tech valuations, sticky inflation, and budget talks. These factors have played a significant role in the recent volatility, as seen in the decline of the S&P 500 by roughly 10% since hitting an all-time high on February 19, 2025. The CBOE Volatility Index, commonly referred to as the “fear index,” has nearly doubled, indicating heightened market uncertainty.

Tariffs, in particular, have propelled uncertainty, with consumer sentiment falling in February by the largest amount month-over-month since August 2021. This uncertainty can lead consumers to pull back on consumption and companies to retrench by holding off on investments. However, it's important to note that the consumer is still doing relatively well, based on record-high net worth and wage growth that has outpaced inflation. Investors should consider sticking to their long-term plans, as not all proposed tariffs may be implemented, and those that are may not change the fundamentals of most businesses.

Tech weakness has also led markets lower, with the tech sector being the second-worst performing sector year to date. This is partly due to the arrival of China-based DeepSeek's artificial intelligence model, which has led investors to shy away from riskier, growth-oriented sectors. Despite this, corporate earnings have remained strong, including many companies in the tech sector. Diversification across sectors may help mitigate concentration risk in tech stocks.

Recession fears have resurfaced, with the Federal Reserve's preferred recession indicator casting a warning sign when the yield curve inverted. Additionally, the Atlanta Fed's GDPNow suggests the US economy might contract by 2.8%. However, Dirk Hofschire, managing director of Fidelity’s Asset Allocation Research Team, thinks there isn’t enough evidence to suggest the US economy is dipping into a recession. Investors concerned about the near-term prospects for the US should consider international diversification to reduce overexposure risk to the US.

Investors can leverage this information to optimize their investment strategies by considering international diversification, sector rotation, and other strategies to navigate volatility. For example, investors can consider U.S. equities and both value and growth stocks among areas of opportunity in 2025. Additionally, investors should watch for signs of market euphoria, including sustained retail stock purchases and aggressively positive net fund flows near 2021 levels.

In conclusion, the COVID-19 pandemic's impact on market volatility trends offers valuable lessons for investors seeking to navigate future market uncertainties. By understanding the asymmetric impact of positive and negative shocks on market volatility, diversifying across different markets and asset classes, and being prepared for rapid and severe market reactions to unexpected events, investors can better protect their portfolios from significant losses. Additionally, by considering international diversification, sector rotation, and other strategies to navigate volatility, investors can optimize their investment strategies in the face of current market challenges.

Ask Aime: What is the current market situation, and how do investors adjust their strategies?