Apr 18, 2020
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FAQs: Coronavirus V/S Markets

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Travels banned. Events canceled. Gatherings prohibited. And, the stock markets in a free fall. Are we moving towards a COVID-19 Global Recession?

Up until a month ago, this seemed far-fetched. The coronavirus outbreak was assumed to be a localized problem for China and any spillover effects to the rest of the world could be comfortably managed by a bit of policy easing. When it became clear that the outbreak was not confined to the dragon and that the economic effects would be more widespread, forecasts were revised down. The idea that this is going to be a V-shaped recession (i.e. downfall in the first half of 2020 followed by a recovery in the second half), like that of 2008, looks absurd after the tumultuous events of the past week. Making things worse is the crude oil war between Saudi Arabia and Russia, which has injected volatility into other assets like the commodities and the currency market. After a crash of this magnitude, market confidence usually does not come back soon.

What exactly is going on and why is the stock market freaking out?

Markets really don’t like uncertainty, because it makes it hard for businesses to plan. So the spread of a potential global disease fuels huge panic. Investors have been selling their stock to get their money out of the market, or into “safer” investments. Last week $5 trillion was wiped from global financial markets.

The ongoing coronavirus pandemic has already affected thousands of lives and has caused a global health crisis. It has also wreaked havoc in the global financial markets, including in India. First, “Black Thursday” happened on 12th March 2020, when major global stock markets registered the greatest single-day percentage fall since 1987. The Nifty 50 was also down about 8 percent the same day. The very next day, Nifty hits the lower circuit within the first 15 minutes of trading and, all of a sudden bounces back 15 percent from its intraday low to end the day at ~5 percent higher. In the US too, major indices posted a jump of about 10 percent just one day after Black Thursday. Over that weekend, the US Fed cuts the interest rates by 100 bps to 0.0–0.25 percent. The markets were expected to cheer up, but this time, the US markets crashed even more, on Monday, ending the day at about 12.7 percent down. Such incidents signal that the markets just didn’t seem to care.

Which stocks are being most affected?

All of them! But oil stocks plummeted as travel has been cut, factories across China closed, and manufacturing and deliveries halted.

There’s still so much we don’t know about the coronavirus, which makes the potential economic fallout extremely uncertain, for both China and the rest of the world. China makes up a much larger share of the world economy than it did in 2003 when SARS broke out. Under Armour, Apple, Nike, and a plethora of companies have shut down their brick and mortar stores in the US and across the world. They are already admitting their fear with regard to the negative effects of the virus. So too are industries tied to travel and tourism.

No major stock index was immune to the sell-off contagion. London FTSE 100 dropped 6.6%, Germany’s DAX declined 7.2%, and France’s CAC 40 shed 7.5%. FTSE MIB (Milano Italia Borsa), Italy’s benchmark stock index, which has dropped 18% before 12th March, fells another 6%. Australia’s S&P/ASX 200, which entered a bear market on March 11, sank 7.4%. The Indian stock market, as mentioned above, also plunged into the bear territory.

Will There be Any Lasting Economic Consequences of COVID-19?

  • Indirect hit to confidence (wealth effect): As markets fall and household wealth contracts, household savings rates move up, and thus consumption must fall. This effect is powerful, particularly in advanced economies, and will cause both a steep and sustained decline in market confidence.
  • A direct hit to consumer confidence: Financial market performance and consumer confidence correlate strongly. COVID-19 appears to be a potentially potent direct hit on confidence, keeping consumers at home, weary of discretionary spending, and perhaps pessimistic about the longer term.
  • Supply-side shock: As the virus shuts down production and disables critical components of supply chains, gaps turn into problems, production could halt, furloughs and layoffs could occur. There will be huge variability across economies and industries.

What’s going to happen next?

No one knows yet! A major reason for the market’s volatility is uncertainty. Markets are all about expectations. Even if nothing happens on a given day, stock market prices will still move if investors expect something to happen in the future. And if there is a mismatch between the expectations, the markets do react. At present, the volatility in markets show no signs of stopping, and the daily moves of 3–5 percent in benchmark indices have become a commonplace.

It has been clear from the start that COVID-19 affects both sides of the economy: supply and demand. The supply of goods and services is impaired because factories and offices are shut, and output falls as a result. But demand also falls because consumers stay at home and stop spending, and businesses mothball investment. It also seems likely that the economic pain will go on for longer than originally estimated. Having imposed bans and restrictions, governments and private-sector bodies will be cautious about removing them. There is also a question of how long it will take consumer and business confidence to recover. Policy action by central banks and finance ministries can help in this respect but only so much. The chances are that the imminent recession will be U-shaped: a steep decline followed by a period of bumping along the bottom. There will be a recovery but it will take time and only after much damage has been caused.

The Capital

FAQs: Coronavirus V/S Markets was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Article Categories:
Coronavirus · crisis · economy · finance · stock-market

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