24 Mar Insights of COVID-19 effect on the stock market and the economy
After the coronavirus pandemic, everything was shut, leaving millions of people unemployed and causing the largest quarterly decline in GDP. Last time it was the Great Depression when such a large drop in GDP took place. On June 8, when WHO announced the worsening conditions of Covid-19, it started affecting the stock market as it began its fourth consecutive week of the rally.
The S&P 500 index lost its historic plunge, i.e., about one-third of its value, which generally it gained between February 20 and March 23 2020, and set back to where it started. Economic uncertainty always results in the volatility of the stock market. However, you can also see a familiar pattern across most recessions.
Initially, the market drops drastically as the bad news comes into force and then gets accelerated by panic. Panic occurs when investors start selling and automatically triggering algorithmic trading. Usually, the overall effect on shares is savvy investors’ effect as they exploit by buying shares. As a result, the economy suffers from the full or partial rebound. For best and cheap prices you can visit https://buyshares.co.uk/ecn-brokers/
In the current scenario, both rebound and decline is taking place simultaneously. At the end of March S&P index dropped by more than 30 percent. However, during the mid of June, the index again jumped back to recovery by 5 percent of its value.
In one of the influential New York Times columns, a famous economist once said what many people think when considering the economic implication of stock prices everyone should remember the stock market is not the economy. The relationship between economic growth and stock performance is always somewhat loose and non-existent.
What explains the disconnection between recession and the pain of unemployment and also the relative resilience of the market? This market outcome can largely depend on two factors. The market values the cash-flow of companies and the long-term profit in this year and several more years. After calculation, you will clearly understand why even such worsening condition does not affect the value of companies on average. No one can estimate the real extent and length of this economic downturn. But let all of us assume the total corporate surplus will be 50 percent lower than it would have been in the next two years. And again, it will fall back to the permanent level, i.e., 5 percent lower than otherwise. Discounting the impact of these lower profits and cash flows indicates a reduction in the market’s present value, which is less than 10%.
The second reason for the market outcome is that the industry composition of the S&P 500 is continuously changing for over 25 years. It is now heavily affecting media, technology, pharmaceutical, telecommunication, and medical devices. They all are fast-growing industries and doubled to about 40%. However, the slow growth industry like consumer and industrial product has declined to about 20 percent from about 35%.
Moreover, most companies’ shares in these sectors are booming right now than it was at the initial stage of the year. In contrast, the gas and oil, and travel industry face a downturn by 20 percent or more. But as the S&P 500 weightings have changed, these impacts are not resulting in any change on the market index they would have undergone 25 years ago.
Apart from the above, few other factors lead to stock market reaction. Some large employment sectors like the department stores are suffering drastically due to Covid-19. Their market capitalizations declined at the beginning of the crisis. However, further deduction didn’t affect the index much. In addition to these industries, many high employment sectors like dry cleaners, restaurants, and local services are influenced mainly by privately-owned companies whose effect doesn’t impact the S&P 500.
There is a fast-growing research team that overlooks stock market responses as a result of the pandemic situation. According to the insights, the stock market dynamic during the crisis might look random, insane, and even irrational at some point in time. On closer inspection, they did not believe blindly; several studies depicted that the stock market influenced many discounting companies like the one financially fragile and subject to disruption. Moreover, it affected the international value chain and those vulnerable to social responsibilities and less resilient to social distancing.
The three main findings which were discovered due to the stock market reaction of Covid-19 were explained. The first finding until February 21, 2020, was the stock market strongly reacted as the numbers of infected people were increasing, and the volatility was becoming the primary concern of every investor. But, the people were no longer troubled by the news of pandemic after following the Central bank’s intervention. Thus, the price regained its position all around the world.
Secondly, the characteristic which was seen around the country was at its best, and it did not affect the stock market responses. The stock market did not react strongly in most countries due to exposure to transmission vectors, i.e., for countries with a high-risk population. It can also be due to the structural economic fragility of the highly indebted countries.
The third reason behind it was the investors were sensitive to the health crisis in neighboring countries, mostly the wealthy nations. And lastly, measures like government guarantees, credit facilities, lockdown measures, lower policy rates, and ways that mitigated the decline in stock prices.
On the other hand, the dynamic of the stock market due to coronavirus is not entirely accidental. Notably, the study says that the health crisis did not influence the stock market in the country at the beginning. But instead, the health policies implemented after the declaration of the emergency. The government implemented health policy to control the spread of the virus and the macroeconomic policies aimed at supporting companies.
However, when we look at the stock market during the current health crisis, the short-term earnings outlook declined significantly. But the price-earning of the companies received an increment. In June, the decline in stock value had not reached the same loss as in the short-term earnings outlook.