Apr 28, 2020
Written by:
Al Hill
The recent weeks have been the scene of a worldwide health crisis that has drastically impacted the stock markets and global economic growth. The Coronavirus (COVID-19) spread from China into a worldwide pandemic and caused an unprecedented stock market crash in February 2020. The S&P 500 has experienced a collapse of about 35.5% in almost 30 days. As has said Joseph Stiglitz, Chief Economist at the World Bank,
This is a different kind of crisis than normal crises. It’s just not a problem of aggregate demand.
We will discuss the COVID-19 pandemic and its impacts on global economies, and ultimately how this pandemic was responsible for the 2020 stock market crash. I will focus on the following:
Before discussing these points, let us first talk about how the COVID-19 pandemic started and how it spreads the world.
Several scientific papers document that the coronaviruses were first discovered in the 1930s in domestic poultry and usually cause respiratory, gastrointestinal, liver, and neurological diseases in animals. Only 7 coronaviruses are known to cause disease in humans. Four of the 7 coronaviruses most often cause cold symptoms. The COVID-19 pandemic is an ongoing pandemic characterized by acute, sometimes severe respiratory disease in humans. This is caused by a new coronavirus SARS-CoV-2.
There exist other kinds of coronaviruses such as MERS-CoV which was identified in 2012 in the Middle East, while SARS-CoV-1 was identified earlier in different regions around the world. The new Coronavirus that the world is experiencing is an advanced version of the SARS-CoV-1. It was identified in December 2019, in the city of Wuhan, in China. According to the international society of infectious diseases (ProMED), more than 677 570 cases have been identified in the U.S.A, on April 16, 2020, with a mortality rate of 5.1%. The situation is nowadays less pronounced in China.
The COVID-19 has been characterized by Zhu, Zang & Wang (2019) and they show that SARS-CoV-2 is 75 to 80% identical to SARS-CoV and is closely related to bat coronaviruses. That’s why bats are considered as the primary vector for the virus. It can also be identified in animals like cats, camels, and cattle. This is usually called zoonotic transmission. According to researchers, a large majority of people who got the disease early on were linked to a live seafood and animal market in China.
The first cases of COVID-19 may come from animals sold in the market and has mainly spread from person to person (see Sabir, Lam, Ahmed et al. (2016)). Usually, SARS-COV-2 spreads when an ill person coughs or sneezes. Sick persons can emit saliva from their mouth at 6 feet from their position. If you inhale them, it is possible to get the virus and get sick.
Another way to get the virus can come from touching an infected object or an infected person and therefore touch your mouth or nose. Several papers demonstrate that the COVID-19 can live for more than 4 hours on different types of objects. We can notice a lifetime of 4 hours on Coppers, 24 hours on Cardboards, and up to 3 days on Plastics.
Researchers have also documented Airborne transmission (demonstrating that the virus can live in the air for 3 hours and if you breathe the infected air, you can get the virus) and fecal-oral transmission (showing that virus particles can be founded in sick people’s poop).
Studies have also documented the possibility to get infected by COVID-19 even if one has not traveled or has not been exposed to a sick person and it’s not possible to identify the source of the infection. This is usually called the “community spread”. These cases have been identified in California.
There are also people who do not manifest the symptoms of the virus but can also be a vector of transmission. The risk of infection of the Coronavirus can increase with age. Children are less likely to be exposed to the virus, while people of over 65 are most likely to get severely sick. Also, people working or living in hospitals, or having a weak immune system are highly exposed to diseases. For example, people suffering from severe obesity, diabetes, asthma, cancer, heart diseases, etc.
According to the website Worldometers, at the date of April 17, 2020, more than 2,232,627 cases of COVID-19 have been identified with 153,296 deaths and 568,231 recoveries, which represents a mortality rate of 6.8% and a recovery rate of about 25.4%. The statistics from the World Health Organization (WHO) are slightly similar. Up to 113 countries, areas, or territories are concerned by the virus.
Europe and North America are the most affected zones in the world with 45% and 33.5% of confirmed global cases respectively, while Africa and Oceania are the less affected continents representing 0.9% and 0.35% of the global cases respectively. Even if Asia is the continent where the virus took-off, it’s only the third continent affected by this virus, representing only 15.9% of the global cases.
In terms of deaths, Europe and North America registered the largest number of death in the world which represents 62.4% and 25.5% of the total deaths respectively. In contrast, Africa and Oceania registered the lowest number of deaths, which is 0.66% and 0.05% of the total number of deaths respectively.
United States of America (USA) is the most widely affected country registering 31.3% of the total cases in the world and 24.1% of the total number of deaths. It is followed by Spain (8.4% of the total number of cases and 12.7% of the total number of deaths) and Italy (7.7% of the global number of cases and 14.8% of the global number of deaths).
We can also notice that 7 of the 10 most-affected countries in the world are from Europe, two are from Asia and the USA is the only one representing significantly the whole American continent. Ten countries represent 77.5% of the total number of confirmed cases in the world with 86.7% of deaths registered in the world.
Concerning the distribution of COVID-19 since December 31, 2019 to April 17, 2020, it can be observed that the number of confirmed cases has experienced an exponential evolution with an upward sloping shape from December 31, 2019 to April 01, 2020 but started to flatten since the beginning of April as reported in the following figure by the European Centre for disease prevention and control.
In contrast, the number of deaths is still displaying an exponential evolution and the most represented countries are Europe, Asia, and America.
At the worldwide level, we are still on the upward sloping shape either in terms of the total number of cases or in terms of the number of deaths.
With the outbreak of COVID-19, global stock markets have experienced a severe crash, beginning February 20, 2020 and lasting thru March 23, 2020. This global market crash is comparable to the Great depression in 1929, in the USA. Starting February 20, stock markets around the world registered the largest weekly decline since 2008. Global demand shocks and the crashing oil markets (due to the conflict between Saudi Arabia and Russia due to Russia’s refusal to curb oil production) has been another catalyst that led to a serious increase in the volatility and reaction in the stock market.
With the multiple risk factors of the Coronavirus pandemic, almost all the countries in the world have decided to impose a massive worldwide lockdown in order to enforce social distancing. A large majority of companies have shut down with employees working from home. Only some essential services are open to the public such as groceries, restaurants with delivery services or curbside pickup, hospitals, and doctors offices.
When taking a look at the main observed indexes in the global stock market, we can observe that the S&P 500 observed a drop of about 35% in almost 1 month. The Dow Jones has experienced a drop of 36%, which is approximately 10760 points loss for the period February 20 to March 23rd, 2020. The CAC 40 and Dax 30 are under pressure in Europe dropped by almost the same rate, which is 38% in the same period. The FTSE 100 in Japan has reported a collapse of 30%, while in India, the Nifty index dropped by almost 50%.
The volatility index (VIX) has exploded and increased 432% during that period, signaling total panic in the markets. This explosion of the volatility was rapidly followed by a quick drop starting by March 23, 2020.
The airline sector has suffered tremendously. Airline companies around the world have canceled their flights. Shares of United Airlines and Delta Airline were down by more than 50%.
The International Air Transport Association (IATA), reported that worldwide airline passenger traffic will fall by 48% for this year due to the coronavirus pandemic. Projections estimate losses of $314 billion in revenues due to the severity of the COVID-19 pandemic, as business travel demand dropS and government travel restrictions increase. More specifically, Asia is projecting a loss of 50%, while Europe and America are estimating a 55% and 36% loss in passenger traffic compared to the third quarter of 2019, respectively.
Additionally, the World Trade Organization is projecting in the best-case scenario of about 12.9% and the worst-case scenario a drop of 31.9% in air cargo volume for this year. Furthermore, the industry is experiencing a liquidity crunch, with a cash burn of about $61 billion for the second quarter of 2020.
In contrast to the airline industry, essential industries, are more resilient to the 2020 stock market crash. As essential industries, we have Health care, Food, basic transportation. Indeed, goods and services produced in these industries are more inelastic in the sense that the aggregate demand does not change significantly even if the economy is in recession.
For example, Vertex Pharmaceutical (VRTX) has reported an increase of 24% since January 2020. On the same line Walmart (WMN) and Kroger (KR) have gained an increase of 12.25% and 11.45% in the same period respectively.
Additionally, even if online-based companies such as Zoom (ZM), Amazon (AMZN), Netflix (NFLX), eBay (EBAY) have been impacted by the crash during the period February 20 – March 23, those companies have reported a quick recovery of their drawdown. For example, Zoom (ZM) has gained an increase of 42% since the beginning of the 2020 stock market crash. At the same time, Amazon (AMZN) and Netflix (NFLX) have gained 10.31% and 9.52% respectively. The other stocks I mentioned also follow the same pattern.
According to the International Monetary Fund (IMF), the global economy will experience the worst recession since the great depression and this is the first time where developed economies and developing countries are in a recession.
Indeed, with great lockdown, the world economy may expect a decrease of global growth rates by almost 3% during the second quarter of 2020, representing a downgrade of 6.3 percentage points from January 2020, which is 30 times the effect observed during the global financial crisis in 2008 – 2009. These projections assume that the majority of countries in the world will experience their peak in terms of pandemic spread during that period.
In the best-case scenario in which the pandemic widespread is efficiently controlled, it can be projected that the United States, Eurozone, and Japan will experience a decrease of their GDP growth rate by 6%, 8%, and 5% respectively, while China and India might be the beneficiary of this crisis, reporting a positive GDP growth rate of almost 2% in 2020 (see IMF world Economic Outlook ).
In the worst-case scenario with more uncertainty in the controlling procedure of the health crisis, one may expect an additional loss of 3 percent for this year and eventually a fall of the world GDP growth rate of 8% in 2021 if the virus persists and this with hurt the financial conditions of all the countries around the world with the drastic increase of the global unemployment rate. These results were expected as it has been documented by Wang, Yang & Chen (2012).
Indeed, the authors document that a contagious disease doesn’t only affect the health and lives of people but also leads to economic growth stagnation, but it can produce abnormal returns in the biotechnology sector. On the same line, the European Commission produced a previous report estimating the macroeconomic effects of a pandemic in Europe using a quarterly macroeconomic model (see Jonung and Roeger (2006)). Indeed, the European Commission shows that the effect could experience a GDP growth rate drop in the range of 1.6% – 4.1%. Similar studies have been done for the United States, Canada, Germany.
Concerning Sub-Saharan Africa countries, it is expected that the COVID-19 pandemic will lead to a decrease in the GDP growth rate and that could reach the range of -2.1 to -5.1% in 2020. This is evaluated as an output loss between $37 billion and $79 billion, including trade and value chain. Additionally, this crisis could affect also the food security by reducing agricultural production by up to 7% and a decrease of good importation by up to 25% (See World Bank press release April 9, 2020). The oil exploitation and tourism sector have been also affected due to the severe reduction of external demand.
With the object of respecting the social distancing, the great lockdown has imposed a large majority of the population to stay at home. This sudden stop of the economy has pushed people to seek new ways to connect and hang out with their family and friends and even to connect with business partners.
On the same line, companies are looking for new ways to run their business. Video chat is taking off especially in America and Europe. For example, applications such as Google Duo, Nexdor, and Houseparty are experiencing a huge increase in their traffic (see Similarweb).
Indeed, these applications have gained an increase of 12%, 73%, and 79% respectively, in daily traffic since January 2020. On the same line, the new way to teach classes in schools is by using applications such as Zoom, Google Classroom, Microsoft Teams, Google Hangouts.
On the other hand, applications for delivery services such as Uber Eats, GrubHub, Delivery.com, Postmates, DoorDash, Caviar have also gained in terms of usage as the on-demand food is expected to increase and be a $365bn industry.
Applications for entertainment such as Facebook, Youtube, Netflix, and Whatsapp have also gained in terms of utilization. We expected that these internet activities will increase significantly in the aftermath of the crisis.
As we already know, the infectious diseases do not affect only the health and lives of peoples but also the whole economy of all countries around the world, we expected governments to react at the macroeconomic level and response proportionally to the sectors suffering from this Health and Economic crisis. More specifically policymakers should think about not only monetary policies but also policies encouraging public spending in order to encourage the private sector to produce but also to stimulate aggregate consumption.
Indeed, according to the popular Taylor rule, in order to encourage production, Central banks should cute the interest rate so that private firms can take more credit and invest more and therefore recruit more employees. By increasing of employment rate it will lead to an increase in consumption. To boost more this approach, Central banks usually print more money in the economy by buying assets from the private banks and short term bonds from governments. This is called quantitative easing.
These strategies become more important when it is observed that the short term interest rate is closed to zero. This is the situation that most of the advanced economies are experiencing. Indeed, the interest rate in the United States and Canada is almost the same and is currently evaluated at 0.25%. We can observe lower rates and even negative rates in Europe. For example, the short term interest rate in France was reported at -0.36% in March 2020. Almost the same rate is observed in Italy, Germany, and other countries in the EURO Zone.
Additionally, policymakers in advanced economies have planned a recovery strategy which is mainly based on implementing a fiscal stimulus program. The main goal of this policy is to guarantee that even if there is a drastic increase in the unemployment rate, the aggregate consumption in the economy is sustained at a certain level. Currently, the United States, Canada, France, the United Kingdom, and Germany have already decided the amount to deploy for this program. For example, in the United States, Congress decided for a budget of $2.3 trillion stimulus bill to address the COVID-19 pandemic. In Canada, the budget for this purpose is evaluated at $75 billion. The main idea of this fiscal program is to offer a direct cash payment of $2000 per month during the pandemic period to all eligible persona and small businesses. In France, the package is evaluated at $49 billion, while in the United Kingdom the government is promising a budget of $430 billion and $810 billion in Germany.
Aside, the International Monetary Fund (IMF) is planning a lending capacity of $1 trillion to support the different vulnerable countries from this crisis and are encouraging official bilateral creditors to support their partners for these circumstances. Indeed, some bilateral creditors have prolonged the payment deadline of poor countries in response to this crisis Furthermore in direction of the developing countries and especially for sub-Saharan Africa countries, the World Bank deployed up to $160 billion in financial support for the next 15 months to reinforce their response to the COVID-19 pandemic. This financial support is mainly oriented to help vulnerable businesses and improve the public health reaction.
The pandemic is still ongoing and the uncertainty of the world economy and the stock markets is huge for these recent weeks. Even if we started to see a recovery in the stock market, the panic is still in the market with overreactions of market participants.
The airline industry is one of the most affected sectors while the biotechnology and tech industries are less affected. Moreover, China and India are the countries that will benefit the most from this crisis.
The governments in the advanced economies are already implementing the stimulus package. The problem is that this policy can only hold in the short term and not in the long term. This means that if there is more uncertainty in the world in terms of this pandemic duration, the economy can suffer more and we can have a second phase of the world recession and stock market crash.
Another concern is the capacity of developing countries to address this health crisis and economy recession as their economy is highly dependent on the importation, tourism, and oil price.
In overall, it is expected that all the countries would definitely experience a significant increase in the economy digitalization.
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