As the coronavirus affected international economies, wreaked havoc and cause panic among people, Wall Street didn’t stand as an exception. When details about the COVID-19 virus emerged, the stock market took a major dive- its worst one since the 2008 financial crisis. Back then, we had a poor job market and a recession to blame, but with the lowest unemployment rate and strongest GDP in decades, the tanking stock market is just a spillover effect of this infectious disease. The Coronavirus affected the stock market drastically. Here are the
The Coronavirus Affected The Stock Market Sell-Off
Research shows that the current stock market decline is one for the books. The last time we faced such a severe crisis was in the 1930s, 1987, 2001 and 2008. The uncertainty of how the coronavirus affected us and its outcome has caused investors around the world and in the U.S. to panic and sell their stock.
Just this past week the S&P500 fell by nearly 11.5 percent and has lost more than $1.7 trillion of its value. Other equity markets like the Dow and Nasdaq have fallen by 12 percent and 10.5 percent respectively. Financial assets like bonds have signaled warning signs while treasury yields hit a 10-year low. Stock prices of companies like Apple (5.13% drop) and Google (4.59% drop) have daily closing prices in red ink on the S&P500, further reiterating the panic among investors.
Coronavirus Affected The Supply and Demand
Coronavirus affected the inflation in our economy. As people begin to panic withdrawing money from financial portfolios, stocking up on goods, and businesses are closing the supply and demand for services decrease.With the emergence of the virus in China, the country has shut down a number of factories that have affected the production of companies like Apple (whose products are on backorder) or resulted in a lack of hand-sanitizers around the world.
On the flip side, there is also a demand shock because as consumers see stock prices decreasing due to a lack of supply, they become less interested in buying a product or service because they believe that the company could be taking a major financial hit. AB InBev and Google are among a few companies that say the coronavirus will hurt quarterly figures. This creates a multiplier effect in the economy, causing people to stop making other large purchases as well. This is vividly represented by Apple’s predicament where the decline in stock price is either the result of a lack of demand for iPhones or a lack of supply due to the factory-shutdown.
What’s Next For The Stock Market?
An economics textbook will tell you that the best way to revive the economy from a global slowdown like this one is to cut interest rates but this can be a double-edged sword. While lower interest rates can boost demand and make big purchases more attractive, there’s only so much these interest rates can be decreased. The interest rates in the U.S were already at a historical low before Coronavirus affected them, so governments will need to look for more creative ways to spur economic activity This can include a central bank buyout of index funds or a strong fiscal stimulus for state and local governments.
But despite panic, Coronavirus, the financial benefit is that stocks are low and it is a great time to buy. We still have a bull market that is likely to continue unless the S&P decides to tank by 20 percent.
Written By: Divya Prem