When the Coronavirus first hit, governments around the world did whatever they felt they needed to do to save lives. Now that we appear to be nearing “the end of the beginning” of the pandemic, both governments and the public need to think about balancing the need to save lives with the need to save livelihoods. This includes both the livelihoods of workers and the livelihoods of those who depend on stock market returns. With this in mind, here is a quick overview of the Coronavirus’ impact on the stock market and what it might mean.
Stock market volatility is the new normal
This statement will probably surprise nobody who is even remotely familiar with the stock market or even just human nature. What may, however, come as a surprise is just how volatile stock markets have become.
As an example, the U.S. stock market regulator operates a “circuit-breaker” mechanism. Essentially, if the S&P 500 drops below a certain level within a certain time, trading is halted for a period in the hope that panic-selling will stop and everyone will calm down. The time-out applies to both the Dow and the Nasdaq as well as the S&P 500. This mechanism was introduced in response to the Dow crash of 1987 when the market plunged 22.6% in one day. Since then it has been used a total of five times. Once in 1997 and four times in March 2020.
Of course, volatility basically means ups and downs. After collapsing during February and March, the U.S. stock markets have been climbing back up again. It’s hardly a red-hot bull market, but it’s a vast improvement on what it was.
Government actions will be key to establishing a “new normal”
In the short term, the way ahead will be set out in government policy. Only they have the power to say when and how lockdowns will be lifted. Governments will also have to determine what assistance and relief measures they need to put in place to relieve the pressure on those who cannot earn a living due to the Coronavirus.
On the one hand, governments will be well aware that not only do people need to be able to buy what they need to live but that it’s very much preferable if people have at least some disposable income, which they can spend as they choose and keep the wheels of commerce turning. On the other hand, they will also be very well aware that government spending needs to be covered by taxes or debt and that the latter ultimately has to be repaid out of tax receipts.
In the UK, there is the added complication of Brexit. If the UK proceeds to the agreed timetable, then there will be very little time to achieve anything before the end of the transition period. If, however, the UK extends the deadline to exit the EU so that it has longer to negotiate, then the uncertainty over Brexit will be prolonged and this will also have an impact on the stock market.
The adroitness with which governments manage to handle this juggling act and the speed with which they manage to establish a “new normal” and a clear and confidence-inspiring direction of travel, could go a long way to determining how confident investors feel in their leadership and hence their markets.
What this means for investors
Sadly there are no easy answers here, other than to repeat the obvious advice about staying calm and making sure that you are looking at facts rather than being influenced by “media froth”. It is, however, worth noting that crises do tend to bring opportunities for those who are brave enough to take them and so it could be worth keeping an eye on sectors which could benefit from the current situation while still having potential without it, for example, anything to do with cloud computing.