By The Biz Team (Nicholas)
The stock market is an overall representation of the confidence that stakeholders of different businesses have in the economy of a country. That means a decrease in confidence due to unprecedented and prevailing events, can send the system into a spiral of devaluation. A classic example was the housing crash of 2007 that spread to every facet of America, and even the rest of the world. The effects were so immense, that other industries, like the American auto industry, almost completely collapsed. Some might say the coronavirus pandemic has the potential of affecting investor confidence much more than the last crisis.
A textbook theorization of the effects of COVID-19 on the stock exchange would have anyone worried. The general instinct seemed to be to salvage any resources one had and make off for the hills, rather than invest in companies. However, that has not necessarily been the sequence of events, particularly with the American stock market. At first, the stock market ignored the coronavirus outbreak, perhaps because investors were desperately trying to hold things together before the virus went from Asia to Europe, and finally entered America’s borders. Then panic occurred when the virus engulfed Europe, causing the S&P index to lose at least one-third of its value between late February and March.
As the virus became a part of normal life in America, various states have tried to ease economic restrictions within their jurisdictions so that life can go on. The stock market had significantly rallied since then, and has recovered its points to the position it was in January before Covid-19 was a factor. The question is whether this erratic behavior makes any sense. By all standards of measure, the assumption was that things would have been much worse than they are, considering the rates of infection and fatalities are still unsettling.
Some experts have stepped forward to give their explanations on the puzzling situation. Paul Krugman, a distinguished professor of economics at the Graduate Center of the City University of New York, claimed that the stock market represents the economy. The correlation of the stock performance, mostly driven by base emotions such as greed and fear and the state of economic growth, is quite low.
There is a lot of research on the response of the stock market to catastrophes like Covid-19. Some insights have been garnered already. Though the dynamic of the stock markets may seem insane or irrational during a pandemic, upon closer inspection, it seems the reaction was not as chaotic as first thought. Research is showing that the stock markets were not favorable, especially for the more exposed companies. These are the companies that happened to be financially fragile or subject to disruption because their sales were significantly affected by the virus. It also affected the companies that were not resilient to the new rules of social distancing and travel. For example, the tourism, airlines, and hospitality industry stock portfolios were severely affected. It becomes hard to chart the effects if there are companies that are adapting while others are failing. As stated before, the stock market is directed by greed and fear, so some parties take advantage of the situation to prop up some areas.
Secondly, the government stepped in to create a semblance of order and provide hope to the financial sector. This was done through expansionist policies from the central bank, as well as the federal government. Stimulus checks were issued to every household to help tackle the economic problems, after the pandemic caused the closure of businesses and severe unemployment for the larger population. There was also an extension of enhanced unemployment benefits and more lending to small businesses. If income support to the economy continues, investors and the market may be willing to look beyond adverse economic outcomes. The policies were a collaborative move by the government, public, and private enterprises, to help the population get through the crisis. It sent a message to everyone that they were in this together, and the goal was to come out stronger than ever. Other governments have also adopted such measures, including tax reductions, to ease citizens' financial burdens as they save revenue and reconsider the options available.
The medical news surrounding the progress of the virus, has been a matter of two steps forward, one step back. There is a lot of despair concerning the rates of infection, but the media has inherently been positive about the chances of mortality and a vaccine, as well as other treatment options. If a vaccine becomes available later during the year or 2021, life might return to normal sooner than expected. There was a supposition during the depths of the panic phase that covid-19 is here to stay, and it will not go away anytime soon. But there have been success stories all over the globe, particularly where the virus first ravaged. Countries like China and Italy are beginning to see a return to normalcy as they reopen their economies in concurrence with their decreasing cases. The reopening of the economies in Europe and Asia has further pushed the US dollar exchange rate lower, providing a lift to publicly traded organizations whose revenue is dependent on international earnings.
The US economy is indeed suffering from the more than 40 million people who have filed for unemployment. However, the sectors which have been most affected by the disruptions like movie theaters, restaurants, and tourism do not have significance when it comes to the equities market, so they do not register as much in stock market analysis.