The Economy Post Covid-19

The Stock Market: A likely predictor of the post COVID-19 Economy

COVID-19 suddenly hit, and it hit hard. We are in the grips of a world pandemic. Panic is common and the future unknown. But, can we actually use this outbreak as a predictor of a post-COVID-19 world?

The coronavirus could herald dire economic consequences. Many experts compare it to the previous recessions of 1929 and 2008. But the truth is, this event has its unique place in history. The disease has resulted in domestic lockdowns and aggressive, industry-wide shutdowns.

Obviously, the stock market has been affected too. In fact, the stock market has always been a key indicator of the health and direction of the economy. Stock markets represent large storerooms of algorithms, analytics, near-term predictions, and data. Financial markets are like barometers of the economy. Imperfect as they may be. They measure the economic climate based on prevalent fears, hopes, and predictions. However, let’s assess if they are enough of an indicator of where things are heading.

Not Your Typical Interruption

The Great Depression marked the worst economic collapse we’ve seen. Stock prices declined in excess of 50%. Between 2001 and 2008 we saw falls in asset prices, housing prices, and technology stocks. But this current point in history is a little different.

The economy is being harassed by an incessant disease. We are not just talking about the collapse of an asset bubble. The latter is a more common trait of a recession. So, what are the implications then? One can interpret hope in the economic activity and that asset prices will eventually go back to previous levels.

Another difference is this pandemic’s comparison to the one in 2008. In that recession, U.S. bankers were the target of blame and got punished accordingly. This created panic in Wall Street. This time around, banks and corporations are not the targets. Governments are actually stepping in to help with short-term cash flow. In fact, the U.S. government has gone further. Interest rates have been lowered. So have capital requirements by banks. In addition, the government has dished out an unprecedented rescue program to the tune of $2 trillion. Similar measures have taken place in Australia, the U.K., and other parts of the world. Of course, the dollar amounts vary per country. The point is, governments have stepped up.

These differences may be predictors in themselves. They could herald a more positive outcome post-COVID-19 than in previous recessions. But let’s now turn to examine the reactions to the stock markets in more detail.

Stock Market Reactions to COVID-19

Emotionalism is a hallmark of economic downturns. We’ve seen it in previous recessions and it’s bound to manifest at this time too. The dominant tendency is that of ‘risk-aversion’. Early reactions to COVID saw investors lose faith in the transportation industry.

What followed next was a negative impact on internationally oriented stocks. There was a strong indication of a slowdown in global trade if the pandemic was not contained. However, we saw the telecom industry perform well. Investors thought a home-bound workforce meant an impending spike in associated services.

Then Italy happened. Following the extreme lockdown of its most productive region, markets began to fluctuate intensely. People were struck with the reality of how they would personally be affected by this pandemic.

We then had a conflation of both the stock market and supermarket panic buying. Then, as China’s COVID situation improved, internationally oriented U.S. stock made a positive return. Unfortunately, debt-ridden, cash-strapped companies began to take a beating. The implication was that the health crisis had evolved into a financial one.

Despite the panic-driven reactions, this event anticipates some reasonable economic expectations. It may also foretell fair outcomes for individual companies. World governments have reacted well and availed help where most needed. The nature of this pandemic requires this to continue. Sound fiscal policies and holistic actions are crucial going forward.

What Lies Ahead

This recession is unique for another interesting reason. The future outlook is intimately tied to the nature of the recession. What we are dealing with is a life-threatening disease that has no cure yet. The pressure and incentive to “fix” this problem is pressing.

The race for a cure and vaccine is underway. The hope is that once we have one, the economic outlook will mirror the cure. In fact, there are pockets in the economy that are actually benefitting in the midst of the pandemic.

The tech industry, which is not brick and mortar dependent, stands to come out strong. According to the Russell 2000 Index, it's the small companies that will be most affected. Investors are likely to take advantage of the huge, upcoming tech wave. If it helps the economies of the world, this wave is surely welcomed.

We can only hope that any positive predictions made above will come true. The pandemic may not be the crystal ball we need it to be. Yet, it may contain enough indicators to point to some optimism. That is what the world needs right now: lots and lots of optimism!

#economics #financialmarkets #covid19