How COVID-19 Sunk the Markets
In the past week or two, the economic fallout of the coronavirus pandemic has hit hard: shops, schools, and sports are all shut down as infection numbers continue to rise exponentially. The virus has devastated small businesses and the global economy has ground to a halt. Amidst all the chaos, there is one overarching theme: no one predicted just how bad the economic damage would be.
The stock market is a good indicator of sentiment, so we can begin by looking at the standard benchmark for the US economy, the S&P 500.
Despite some early shocks when COVID-19 began to rack up headlines in late January, stocks were trading at record highs through most of February. Afterwards came a uncertain but steady decline as traders tried to figure out just how much the pandemic would impact the economy. Here is a quick timeline of the key events.
- 1/23: WHO declares that the coronavirus does not yet constitute a public health emergency of international concern.
- 1/27: The S&P has the largest one-day drop since August 2019; the SARS epidemic of 2002–2003 is used as a comparison.
- 2/4: Ten people aboard the Diamond Princess are infected; the market has mostly recovered.
- 2/24: Over the weekend, cases in Italy jump from less than 20 to over 150.
- 2/26: The first case of “community spread” is reported in the US; Trump puts Pence in charge of coronavirus response.
- 2/28: In the worst week since the financial crisis, the S&P tumbles over 10% as Congress and the Fed provide lackluster responses.
- 3/3: The Fed announces the first emergency rate cut since 2008, a bad sign for the economy.
- 3/9: OPEC disintegrates as Russia and Saudi face off, slamming oil down 30% and tripping a market-wide circuit breaker (down 7%) for the first time since 2008; 10-year treasury yields hits an all-time low of 0.31%; Italy imposes nationwide lockdown.
- 3/12: Stocks plummeted over 10% as coronavirus fears mount. The “fear” index VIX hits levels unseen since the financial crisis.
- 3/13: Trump declares a national emergency.
- 3/22: New York issues a stay-at-home order as the number of infections in NYC passes 10,000; Wuhan was locked down at around 500 infections.
Breaking the chart into the four regional stages, it goes something like this:
- China: This is probably going to be like SARS — we can estimate how the economy will be disrupted.
- Asia: The spread seems limited, and Asian countries are handling it well; the virus will blow over.
- Europe: There is a high probability of a pandemic and with it, possibly a recession — pretty crazy!
- USA: Everything is going to sh*t, and there is no real precedent to follow; also, we have to work from home.
The financial markets is a complicated machine, so it is generally difficult to pinpoint where precisely things are incorrect or inefficient in real-time (hindsight is 20–20, but foresight is not). But we can still look back at the past 42 days and figure out what caused this historic drop.
A Lack of Precedence
The impact of COVID-19 is unprecedented. Economically, the five largest drops in the Dow Jones Industrial Average are:
After a decade-long bull market, the stock market has been falling not at the rate of the Great Recession in 2008, but of the Great Depression of 1929. Of course, most analysts are predicting a relatively swift recovery in 2021, but this is scary!
Socially, over 100 million have been ordered to stay at home as part of preventative measures. All major sports have been suspended: the last time (and only time) the NHL’s Stanley Cup was cancelled was in 1919 during the Spanish flu pandemic; the last time (and only time) the Olympics was cancelled was in 1944 during World War II. While COVID-19 certainly does not seem as serious as either of these events, it is clear that the measures required to combat the virus are anything but mundane.
Combine this with the relative lack of experience with SARS-like outbreaks and you get a recipe for disaster. While Asian countries responded quickly and effectively — China imposed a draconian lockdown on Wuhan and South Korea executed large-scale testing — most Western countries do not have the policies in place to be able to respond similarly. It is all too easy to be lured into a false sense of security, like in mid-February when the number of cases in Hubei flattened out.
America’s value of individualism is perhaps its greatest asset; yet, it is also its greatest liability. For instance, the United States has the highest Global Health Security Index in the world due to its innovative private labs. We know how this turned out: the CDC botched their coronavirus testing kit and it took weeks for the FDA to give private companies approval.
In the past week, there have been a lot of warnings aimed at younger folks in an attempt to reduce the amount of crowding in places such as New York parks or Florida beaches. The wording had to be quite specific as well: since half of the hospitalizations are ages 18 through 49, you too are at risk. At Princeton University, students were ordered to pack up and leave within five days. The next day, cups and bottles were scattered all over the campus after a heavy night of partying; a week later, 5 students have tested positive and dozens more pending results. Asian countries have a culture of sacrificing for society, so preventative measures are relatively easier to implement; America does not.
There is also some superiority complex that comes from being American. While other countries have been subject to war and upheaval the past century, the United States has generally gotten a good deal. As a result, it is easy to feel that, even though other countries may have to lock down a city, America will be the exception.
So why did it take New York City 10,000 cases to issue a stay-at-home order, when Wuhan shut down after 500 and Italy locked down after 5000? It takes a lot to get the city that never sleeps to sleep: its never done so before, and its people do not want to. And because of that, the pandemic will hit America harder than Taiwan, harder than Japan, harder than China, and even harder than Italy. This means that while the Shanghai Composite Index has only fallen 10% since its peak, the S&P 500 has fallen over 33%.