What (the hell) has been going on with the stock market during the COVID-19 crisis?
By Iva Sk ~ Iva Skojo
On March 9, 2020, the Dow Jones fell by 2000 points — it’s lowest since the 2008 financial crisis. As a financial advisory intern in New York, I had one of the most unexpected days at work. Our phones were blowing “shall I cash out all my stocks?”, “will I lose all my money?” Our clients panicked. To be fair, that drop was unexpected, COVID-19 was not yet widespread in New York, as most people were still going about their regular routines, but the panic had begun, and so heard the markets.
While my MD (managing director) reassured me and our clients to not worry, the panic was here and we could feel it. He may have been onto something — the market indeed was not headed for a straight downward plunge, the strategy to hold rather than panic sell usually worked out well for investors.
So what happened with the markets, and most importantly why?
For some liquid investors, the COVID-19 season seemed like a perfect opportunity to buy desirable stocks on “sale”, for example, Starbucks (“SBUX” / NASDAQ) was trading at $65.65 on March 13th, which was certainly cheaper than their price two months ago ($90.62). Speculating Starbucks would return to pre-coronavirus levels, investors could buy the stock at a significantly lower price, and sell at a profit. Simply, they got in “low” and aimed to sell “high”. For many long-term investors, the pandemic was an opportunity to buy some stocks at a “discount”.
However, in the midst of rising coronavirus cases and an economic downturn, the market had still failed to price in the economic devastation — but why?
One of the explanations by Isaac Boltansky, director of policy research at Compass Point Research & Trading, is that the global corporates have been calmer about the pandemic due to direct bailouts and quick measures which pumped the money into the economy and the giants. This means that larger corporations have had greater access to government funds.
Another explanation is the relationship between the markets and the economy since the companies included in the S&P 500 and NASDAQ indices do not represent small businesses and hard-hit pockets of the economy. Unsurprisingly, tech giants continue to prosper in this time with increased phone usage and services like Facebook, Alphabet, and Zoom.
What do the experts say? Top bankers and advisors worry the whole response of the market is “unexplainable” and too positive from their perspective. For instance, Bob Michele, who serves as a Chief Investment Officer at JPMorgan, told Bloomberg that “This feels to me like the second quarter of 2008, where the first quarter was horrible, there were policy responses, and the market immediately became optimistic, and the horror of what actually happened starts to hit into the data.”
New York Times also quoted that previous “three-month climb defied gravity and logic”, and that the S&P 5.9% (around 1900) points dropped on June 11th was way more realistic than the previous climb. Companies that were hit most in the drop were those of oil and gas, leisure and travel including but not limited to natural gas pipeline company Oneo, Norwegian cruise line, and Russel 2000. While certain sectors are more sensitive to market reactions, as a whole the stock market may be overvalued.
Following the market drop this week on news of a second wave of coronavirus cases, as investors we must be cautious. The world around us is changing very rapidly, and certain strategies may be more employable than others. Most importantly, in times of market volatility, financial literacy and awareness is now more crucial than ever!