Current and Likely Future Impact of Coronavirus Outbreak on the

U.S Stock Market

Summary

To summarize, this paper examines the impact of the coronavirus pandemic worldwide. The
paper seek to examine impact on U.S stock markets. Effects in terms of comparison to previous
pandemics, its causes, potential outcomes of this crisis and what measures governments have
taken so far to address and mitigate the ongoing issues and future crisis.

Introduction

The coronavirus disease, also known as the COVID 19 is an infectious acute respiratory
syndrome. The first case of this disease was identified in December of 2019 in Wuhan, China.
Since its first reported case, the virus has affected more than 2.25 million people across 210
countries with more than 154,000 deaths world-wide. The first case of the coronavirus was
identified in the United Stated of America in the state of Washington in mid of January 2020.
Since that time, there have been an approximate of 700,000 reported cases in the U.S with
37,000 deaths. The virus which regressed from china spread quickly other countries. The
following figures shows the spread of the virus from china as compared to other countries.

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Since its appearance, the coronavirus has caused a global health pandemic – affecting many
realms of the world. It has impact the world of politics, education, the socio-economy, financial
economy, the environment and climate and has given rise to issues like domestic violence and
racism – while bringing forth many other cultural issues.

As for the economic impact, the coronavirus pandemic has raised severe impact on the financial
markets of the world – including stock markets, bonds and commodity markets. As of now, there
is no real empirical statistics to accurately gauge how COVID 19 is impacting the financial
markets in its true representation – however, certain trends of the past can be looked at to raise
interesting discussions regarding this.

The federal reserve had begun quantitative easing last year – following this, the economic cycles
suffers a crash every 5-8 years so had it not been for the virus, a stock market crash was due at
some point.

A common point is also the American elections – in 2008 Obama had won the Democratic Party
nomination. Currently we have observed the campaigns among trump and Bernie sanders in the
democratic side. American society seems to be divided politically then and now.

Corporate world-wide have had to face lockdown which has massively impacted the financial
markets as employees are forced to work from home. In early February of 2020, stock markets
massively dropped. The Dow Jones and FTSE 100 stocks dropped more than 3% post the
coronavirus pandemic. Soon after, the DAX, CAC 40 and IBEX 35 all fell around 5%.

Soon after oil and gold prices fell and stock market indices reported their sharpest falls since the
2008 financial crises. Markets globally observed sharp volatility and stock markets like Dow
reported their sharpest falls since 2008. Soon, NASDAQ and S&P 500 crashed and closed up. It
became obvious very quickly that the coronavirus pandemic would cause record-breaking
damage to the stock markets.

The world soon saw when Donald Trump – president of the United States signed a bill to state an
emergency situation for pandemic countermeasures, which includes more than 8.3 billion dollars
in government spending.

Global Impact

The first panel shows the contributions to the decline in the level of GDP from the different
element of the shock. The second panel shows the contributions of different regions and

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countries to the decline in global GDP. Commodity exporters are Argentina, Brazil, Chile, Russia,
South Africa and other non-OECD oil-producing economies. See text for details of the shocks
applied. Source: OECD calculations using the NiGEM global macroeconomic model.

The OCED has outlined the following necessary measures:

“Exceptionally low interest rates provide an opportunity for fiscal policy to be used more
actively to strengthen near-term demand, including temporary expenditures to cushion the
impact of the coronavirus outbreak on vulnerable social groups and businesses. Provided the
effects from the coronavirus epidemic start to fade, the appropriate degree of discretionary
support will depend on cyclical developments, the size of the automatic fiscal stabilizers, debt
sustainability considerations, and the need to rebalance the policy mix.

First and foremost, additional fiscal support for health services is required, including sufficient
resources to ensure adequate staffing and testing facilities, and all necessary prevention,
containment and mitigation measures.

 Measures can also be taken to cushion adverse effects of the outbreak on vulnerable social
groups. Short-time working schemes, where available, can be utilised to enhance the flexibility
of working hours whilst preserving jobs and take-home pay, although such schemes do not
protect temporary or migrant workers from lay-offs. Governments can also help households by
providing temporary assistance, such as cash transfers or unemployment insurance, for workers
placed on unpaid leave, and by guaranteeing to cover virus-related health costs for all,
retrospectively if needed.

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  In the very short term, the provision of adequate liquidity in the financial system is also a key
policy, allowing banks to provide help to companies with cash-flow problems, particularly small
and medium-sized enterprises, and ensuring that otherwise solvent firms do not go bankrupt
whilst containment measures are in force. Measures that reduce or delay tax or debt payments,
or lower the costs of inputs such as energy, for firms in the most affected regions and sectors
should be considered. Temporary reductions in the level of reserves banks are required to hold
at the central bank could also be implemented if required. Swap lines between major central
banks may also need to be utilised, particularly if widespread disruption to trade or a flight to
safety by portfolio investors enhances the demand for US dollars.
 In addition to allowing the automatic fiscal stabilisers to work fully, and expanding spending
on health services, targeted and temporary fiscal measures could also be implemented to
support businesses in sectors particularly exposed to a sharp downturn in travel and tourism.
Funds established to reintegrate workers who have lost their jobs due to globalisation could
also be utilised. In the European Union, other potential options are to adapt temporarily the
state aid framework, as was done at the height of the financial crisis in 2008-09, or to allow
more leeway within the EU fiscal rules to affected economies, in recognition of the exceptional
circumstances.” OCED 2020

Selmi and Bouoiyour (2020), study the impact of the coronavirus pandemic across the G7 stock
markets (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States).
They used event study methodology to assess the abnormal returns behaviors across different
G7 stock markets. Data collected in the study was from stock prices of France (CAC40) ,
Germany (DAX30), Japan (Nikkei 225), the United Kingdom (FTSE 100), the United States
(S&P500), Italy (MIB 30) and Canada (SP-TSX).

The abnormal returns and cumulative abnormal returns across the G7 stock markets are shown
that as uncertainty rise a sharp rise is notices in systematic risk for all countries. The results
were as follows:

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The following table shows cumulative abnormal return of the stock markets that the study
mentions:

Before the coronavirus pandemic, many companies had great amount of borrowing with junk
ratings combined with leveraged loans. After the stock market crash due to the pandemic of
corona, bond prices unexpectedly moved in the same direction as stock prices.

Treasuries in market depth and measures of liquidity recorded its lowest levels in the 2008 crisis.
In march, the bank of new York announce 1.5 trillion dollars in repurchase agreements in the
U.S to allow smooth functions of short term markets that banks may lend to each other. In mid of
March, the U.S Fed shared 500 billion dollars in treasures and 200 billion dollars in government
backed mortgage securities over the following months. Soon after, it was shared that the
Commercial Paper Funding Facility would use 350 billion dollars in the commercial paper
market.

The S&P 500 observed wide circuit breakers during the opening hours on early days in March.
Trading also halted on both Dow and the NASDAQ.

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The Dow and S&P 500 have both been seeing drops due to uncertainty around the global
coronavirus pandemic, while the Chicago Board of Exchange Volatility Index has been rising
steadily since the middle of February as the virus began to spread around the world

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It is being predicted that unemployment levels will rise to 13%. Uncertainty among investors has
clearly affected stock markets globally. Experts say that although the severe stock market crash
is primarily associated with the coronavirus outbreak – it is not the sole reason affecting the
markets.

Once the stock market crash began, U.S Treasury securities fell by 1.5% as the yield curve
inverted and the 10 year yield fell below the 3 month yield.

Historic Market Falls

The graph below compared the coronavirus stock market crash to other crashes in history – like
the great depression, financial crisis of 2008 and Hitler’s invasion of France and black Monday
etc.

The coronavirus crash wiped out more than 5 trillion dollars in share of markets value within a
week – instilling fear in investors for their investments. Comparing previous crashes we see, that
the S&P 500 was back up one year later compared the crashes each time. The trend explains that
stock markets not only readjust but are able to make even greater gains overtime post the
crashes.

The coronavirus pandemic is not the first health-related outbreak in history which has impacted
global stock markets. It can prove to be useful to compare this pandemic to other pandemics that
the world has suffered from previously. The virus called H1N1 which originally was reported in
1918 – also known as the Spanish flu. Later other versions of this virus, called the H2N2 AND
H3N2 later appeared in 1857 and 2009. A major difference between the impact of previous
pandemic and this coronavirus pandemic is the advancement of technology, increased

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globalization and as a result, how quickly information spread globally now as compared to then.
As observed from economic events from these previous pandemics in history, the impact on
economy post a pandemic typically lasts one to two years.

Intervention of the Central Bank

The federal reserve of the US decreased their rates of interest by 50 basis points from range of 1
to 1.25%. Following this, the bank of Japan and Bank of England monitored markets closely to
sustain financial markets. Gulf countries central banks also cut their rates of interest by 0.5%

Stock Market Analysis

A 10% decline was seen in world-wide stock markets and this decline increased up to 30% by
mid of March. Investors in the U.S early on demanded government bonds of longer term periods.
A 60% fall of market was observed in 30 year old bonds – was a record-breaking historic event
observed in financial history. It will be interesting to see how these stock market variations and
changes will impact investor’s growth expectations of future market changes and returns

Term Structure of Dividend Futures

Niels and Koiken (2020) examined future dividends from the European unions and the U.S and
assesses that prices of stock markets had not dropped much which they believed shows
expectations of investors on future growth rates such that short term profits changed minimally
and they believed this was an interesting observation.

The U.S’s lockdown caused primarily led to its market crash and it was assessed that this crisis
will not change expectations of future dividends for the upcoming years and at least for the next
three years and it was predicted that after the first three years, future dividends would experience
an increase and that rates of discounts would decrease due to the risk advertence of investors.

How the coronavirus pandemic is different from the 2008 crisis

The US Federal Reserve has a 500 basis margin to lower interest rates that they used to stimulate
the economy – by funds lowered from 5% to almost zero. However in 2020 the Federal Reserve
only had a margin of 160 basis points. This is often observed by economies – as they used to
lower interest rates to manage slumps in economies or control the economic crisis. This is often
used to manage recession.
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Moreover, quantitative easing is also observed – this is done when lowering interest rate alone is
not sufficient to stimulate economies. However, governments must we aware that quantitative
easing can risk inflation within economies – so typically only certain list of banks benefits from
quantitative easing. It can be roughly estimated that 4.2 trillion dollars are being printed.

There are also many things in common between the 2008 and 2020 crash such that the decrease
in market prices at both times have been similar. The degree of uncertainty during both times by
investors is also similar which has been noted to affect market prices.

Moreover, both stock market crashes impacted global policies both fiscal and other
governmental policies. Other differences between both crises is their origin, the 2008 began in
the U.S with a housing market crash and scandal in housing loans. It was also relate to the
financial market but the 2020 crash began in China

The current crash of the stock market has resulted in an inverted yield curve – which is an
abnormal situation. It only occurs when near-term risk is greater than in the distant future.
On March 9, investors demanded a higher yield for the one-month Treasury bill than the 10-year
note.
Specifically, the yield curve was: (The balance.com, 2020)
 0.57% on the one-month Treasury bill
 0.33% on the three-month bill
 0.38% on the two-year Treasury note
 0.54% on the 10-year note
 0.99% on the 30-year Treasury bond

It is also often said that inverted yield curves will lead to a recession which is strongly being
predicted as per past trends from 2008, 2001, 1991, etc. Bond yields across the U.S has seen
record breaking lows. Demand for bonds was so high that it drove down yields to historic low
levels.

How it might affect us

The market crash has decreased value of investments be it in retirements of funds invested in
stocks. Investors will seek to panic or sell their stocks during this time. It will be difficult to
assess when the market will stabilize to buy again. Interestingly, strong demand for U.S
treasury’s lowered its yields. Interest rates on auto, school, and home loans may also drop to
record-low levels.

Incoming Recession
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The pandemic has impacted companies in the U.S all across – companies will have to re-
strategize their operations as most of them are dependent on international trade and as Trump
make trade internationally more difficult with travel bans – it will be interesting to note how this
will continue to impact businesses in the U.S.

It is being said that stock market lows are yet to follow and some say, this lockdown may
continue for the next years to come maybe at most 2023.

Personally, I believe that we must slow down personal investments, think about buy or sell
carefully as recovery of the stock market is unpredictable as of now.

Conclusion

A combination of stock market crash and inverted yield curve may lead to a dense recession.
Slow economic growth in this pandemic has and will continue to slow down businesses. It will
be interesting to see how the outcome plays out but one thing is for sure that the effects to
recover will take long. Government and policy making expperts must step in to understand how
to detect future crises in order to mitigate long term economy impacts because coronavirus
pandemic is not the first or last of its kind – in all surety.

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