Coronavirus and the Stock Market
Updated: Oct 2, 2020
COVID-19, often referred to as the Coronavirus, seemingly started in December, when Chinese officials found patients with Pneumonia of unknown cause. As the months went on, the virus spread past international borders, reaching across the globe. At the time of this blog, there have been over 1.4 million confirmed cases.
The rapid spread of this virus brought with it many tragedies and losses, and in addition, brought with it a stock market crash comparable to the financial crisis of 2008. Besides the rational reason of slower production leading to less output, panic selling by stockholders contributed a significant amount.
How stocks are valued
A public firm’s stocks are linked to their shareholder’s trust in the ability for the firm to produce positive numbers. In the case of airlines, this would be represented by the number of tickets sold, and thereby revenue produced. If people have higher trust in an airline due to an increasing number of passengers, more people will want to invest in the company, making the stocks of that airline more valuable, increasing the worth of the stakeholders’ share deposit. Opposed to this, a reducing number of passengers, as is the case with COVID-19, will lead to a lower level of trust in the airline. The result of this is people selling their stocks and perhaps investing in other, more lucrative firms. The largest player in determining how the stock market flows are not individuals, but very large companies who’s purpose is to trade stocks, such as Berkshire Hathaway. In day-to-day life, this is the cycle that ensues. However, the drop in the market that came with the virus was also due to the less rational reason.
The stock market and panic selling
Panic selling, as well as panic buying, of stocks has a great impact on how stocks are valued. Towards the end of February, when the market values across the globe decreased, shareholders began fearing the effect of how the virus could further impact the economy. Both panic selling and buying is fuelled typically by fear and speculation. In this case, the fear of all production being stopped and the decreasing value of stocks convinced people to sell most if not all their stocks to reduce further loses.
Governments around the world are on the verge of passing stimulus packages, if they have not already done so. This is known as applying an expansionary fiscal policy, which includes the lowering of taxes, or increasing government expenditure to aid the economy in a recession. As an example, the US passed a $104 billion bill, targeting American workers who are ill, under quarantine, and under family leave. An additional $1 trillion stimulus bill is being discussed by the senate, which is more than likely to be passed in one form or another. The discussion of the stimulus had already proven beneficial for airlines and hotel chains, as they had already seen the largest increase in stock value since the middle of February.
European governments are following similar trends, with most firms working with a government-subsidised scheme, called a short-time working scheme. This scheme is meant to be a stimulus to smaller firms, which would otherwise cease to exist under these conditions, allowing for a greater market stability.
The stock market looking ahead
After hitting a low in the middle of March, stock markets have been increasing in value once again. Part of the reason is everyone taking the social distancing more seriously, allowing for a slowing number of people to get infected in one day. As well as this, the previously mentioned stimulus packages prepared by governments has given the market more confidence in being able to bring the economy out of the recession, as well as be able to return to a regular working schedule.
The current stock market for the individual
For the common individual, dealing with stocks is a touchy subject. They are volatile, uncertain, and for many, too risky. However, given that the economy is in a major recession, stock prices are the lowest they have been for a long time. This is a time to do the research to get into stocks, specifically for sectors whose large purpose is dealing with the virus, such as companies developing vaccines or coronavirus quick tests.
There is also another opportunity for young entrepreneurs. Since many individuals find it too risky to invest in stocks, opportunists could jump in on the chance to make stocks a more accessible asset. One could build a business model centred around helping people invest on a smaller scale, but also growing in size to be able be hired to advise larger companies on which sectors seem prosperous, and through this, influence in which direction the economy changes.