COVID-19 and stock market reaction

The short-term impact of COVID-19 on the world economy has been significant in that, with a few notable exceptions (food being an obvious example), huge swathes of economic activity have halted, with large numbers of businesses seeing a significant reduction in revenue, leading to the widespread furloughing of staff. Whilst this is clearly unprecedented in peacetime, the reaction of independent central banks and governments has placed a ‘limit’ on the damage being done to the global economy.

Central banks have reacted by injecting large-scale additional liquidity into the system, including relaunching and expanding quantitative easing measures, and by slashing interest rates. At the same time, governments have responded by providing direct support to employees and employers, making available grants and soft loans for small businesses and offering significant support for some of the sectors most impacted by COVID-19 (e.g. airlines).

It is self-evident that markets have fallen quite a long way and that the impact of COVID-19 on economic growth in quarters one and two of 2020 will be severe. However, the indications are that the outbreak has a certain lifecycle (using China and Italy as examples). So we can tentatively look forward a few months, with the expectation that from the beginning of quarter three, or perhaps more confidently the middle of that quarter, life for us all might perhaps be returning to normal, with a consequent significant boost to the economy likely. At some point we would expect to see stock markets looking to reflect this recovery through share prices.

Before we get to that point we should not discount the possibility of more shocks to the system, with perhaps further harrowing stories or evidence of the impact of COVID-19, particularly domestically, as well perhaps as the possibility of the collapse of a major company. Incidents such as this will clearly impact market sentiment negatively.

By the same token, however, we should not doubt the resolve of independent central banks and governments to put in place whatever measures are necessary to see us through this crisis. If the history of previous market shocks (1973 oil crisis, 1987 crash, 2000 tech crash and the 2008 global financial crisis) has taught us anything there will inevitably be a recovery in markets and it is only a matter of waiting for this to happen.

As at 02/04/2020

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