The Effects of COVID-19 on the Stock Market

The 2020 COVID-19 pandemic has so far closed counted businesses worldwide, infected millions of people, and forced market prices to dive. But how much economic impact has it had exactly, and how is the stock market responding (and recovering) from the COVID-19 pandemic?

COVID-19 and the World Economy

Federal governments and central banks around the world have been using various methods, such as stimulus packages, to stimulate local economies and mitigate the bad impact of the pandemic on the economy. If their efforts are coordinated and effective, this could mean a major turnaround for the stock markets regardless of how much COVID-19 spreads.

Recently, the UK, US, and European bond yields were driven to unseen lows and markets worldwide plummeted in fear that the virus will continue to spread.

What if the virus spreads even more?

The outcome will depend on a couple of variables. If there is no effective treatment, vaccine, or cure developed for COVID-19, then the worldwide markets might continue to decline regardless of the efforts of banks to stimulate the economy. During the crash of 2008, the S&P 500 fell more than 26 percent, even though various control and stimulating measures were placed in effect.

But the fact is – economical and political policy is very close related, and the degree of which the global economic logistics chain will be delayed will be directly related to the limiting measured governments implement on workers and businesses. 

Equity markets and the Coronavirus?

In the EU and the US, equity markets dropped as much as 30 percent. This decline is enormous, but to understand it, we must understand that the stock market gets is value from the total sum of all the discounted value of all the future dividends.

Some experts are attributing this 30 percent crash to the changes in growth expectations, but for this to be true, the changes in future dividends must be both large and consistent.

On the 24 February 2020, the DOWJ and FTSE 100 dropped as much as 3 percent. This happened as the coronavirus outbreak significantly worsened outside of China in the weekends at the end of February. The DAX fell about 4 percent. So did IBEX 35.

There was also a massive toll in the price of oil, as well as a large increase in the price of gold. COVID-19 and the protective measures that were taken because of it caused an unprecedented shift in economic activity, ultimately leading to the collapse of oil prices. This price shock is the first since the first oil shock that happened in 1973. Oil prices dipped up to 70 percent.

In the days following the end of February, many different U.S. indexes including the S&P 500, the DOWJ, and the NASDAQ-100, all recorded their sharpest drops since the 2008 crisis. The end of February was the worldwide stock markets’ largest decline week since 2008.

A working paper titled “The Unprecedented Stock Market Impact of COVID-19” published in the National Bureau of Economic Research concluded that no previous outbreak of an infectious disease, including the Spanish Flu, has impacted the stock market as much as the novel coronavirus pandemic.

Why has the COVID-19 pandemic had such a significant impact on the stock market even after the February crash?

The current pandemic has vital implications for both the economy and for public health. We cannot talk about the economical severity of the pandemic without mentioning the social implications and the shifts it has created in everyone’s life.

 This is why even companies like Clinical Supplies, who sell N95 masks  have felt the economic hardships.

Part of what makes this pandemic the most economically severe is the fact that information about the illness and pandemic numbers has been widespread and accessible. Europe, the first place the disease spread severely after China, has been completely transparent with its data which has further added to the free flow of information.

When this information is flowing freely, markets are more likely to trigger high daily market jumps and market drops with the skyrocketing of market volatility.

COVID-19 and unemployment.

Another big factor contributing to the sudden stock market plummeting is the fact that the US was hit by one of the most severe crises in unemployment. As of March 2020, unemployment in the US reached 6.5+ million. Millions of people lost their job in retail, travel, and the food industry.

Almost 45 million people filed for unemployment in the United States in the last few months, but fortunately, unemployment is likely to reach new lows after the pandemic. A survey performed by the Economic Policy Institute estimated that the 45 million number is much more than the actual number of Americans who lost their job.

Moreover, President Donald Trump signed an executive 2.2 trillion dollar relief bill that not only gave the economy a stimulus, but also changed the characteristics of unemployment.

 

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