- Minsuh Kwak
How the COVID-19 outbreak affected stock markets and the global economy
The recent COVID-19 outbreak is affecting billions of people worldwide. The CDC just recently announced a complete social distancing program, recommending millions of individuals to stay home: this means that schools, offices, public facilities will be closed for an indefinite amount of time. It all started on December 31, 2019 when Chinese officials announced cases of an unidentified disease in Wuhan, China. Starting early 2020, the virus’s impact expanded worldwide and countries like Italy, Iran, South Korea, and the United States experienced rapid accumulation of coronavirus patients. For instance, according to www.worldometers.info, the number of patients in the U.S. rapidly increased in March, especially in densely populated states such as NYC, New Jersey, and parts of California. Experts suggest that the delayed announcement from China regarding the dangerous disease was decisive for the virus to spread uncontrollably fast.
As the pandemic spread, world economies suffered as it went into a steady decline. This was observed by the mass selling of stocks by panicked traders. The market reacted to recent unpredictability with large drops, triggering a market wide circuit breaker four times in March. These “circuit breakers” also known as trading curbs are temporary pauses that prevent people from selling their stock. The fact that these temporary pauses in stock trading happened four times in the same month represents the urgency of the situation. The current guideline for circuit breakers is a 15 minute pause in all U.S. stock market trading if the S&P 500 index dwindles more than 7% before 3:25 pm, New York time. These circuit breakers have three consecutive levels; the first and second level stalls trading for 15 minutes, while the third level-- initiated when more than 20% drop-- stalls trading until the next trading day (World Economic Forum, www.weforum.org). In a more broader aspect, according to the World Economic Forum, the S&P has declined by 29.5% in two months. The S&P 500 is a market capitalization-weighted index of the 500 largest U.S. publicly traded companies (Investopedia). By March 23rd, 2020, the S&P 500 reached an annual lowest of 2237.40; moreover, the lowest record after 2017 February when the stocks were steadily rising.
Investors fear that although the stock market has reacted to many past epidemics-- a slump as serious as this was never observed. Historically, Wall Street’s reaction to such epidemics were often short lived. For instance, according to Dow Jones Market Data, the S&P 500 posted a gain of 14.59%, in the course of a 6-month change, after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. Other epidemics observed the same tendency as well; furthermore, it can be even concluded that these epidemics, in the long run, did not have a significant effect on the stock market. However, experts worry that the case for the COVID-19 may be different: the impact was too severe and recovery of the market would be prolonged more than investors would expect. Moreover, the real problem is the fact that the situation is constantly changing; experts are having a hard time predicting the possible outcome of the situation.
The observation of the pummel in the stock market is leading investors to plan for situations more serious than a recession. PICMO’s global economic advisor warned that a global economic recession is an inevitable consequence. Although the situation is clearly dire, there is some hope among economists that the economy will be able to start recovering later again this year, depending on the effort to contain the virus. In fact, the market’s plunge was much deeper during the 2008 financial crisis, with the S&P 500 dwindling more than 50% (World Economic Forum). While social distancing can be tough, it is most important that everyone participates in social distancing to minimize the economic damage.