COVID-19 and the Stock Market: What You Need to Know

As the world reacts to COVID-19, the stock market has had reactions of its own throughout each of the major global financial hubs. Combating the spread of the virus has meant shutting down commerce, travel, and limiting several industries’ operations—all of which have impacted commerce and the health of the global economy.

Despite discouraging financial signals, the market hasn’t reacted consistently poorly to the doom-and-gloom that has predominated headlines. The early days of the pandemic led to sell-offs, but there have also been a few micro-surges as well. Simply put, the bear market one might expect after a massive, unprecedented global financial event hasn’t materialized all at once.

Why COVID-19 has little historical precedent for Wall Street

Simplistic as it may sound, the markets might be reacting to the global pandemic in an unpredictable manner simply because there’s no real precedent for what’s happening. There’s no comparison to help contextualize what’s happening in our current environment around the world.

Prior pandemics of the same size and scope, such as the 1918 pandemic (also known as the Spanish Flu pandemic), happened in a bygone era. Since then, the world has become far more interconnected, and its economies more reliant on one another. The financial ramifications of the Spanish Flu are impossible to compare to the COVID-19 outbreak, leaving economists without a practical blueprint based on past precedent.

Parallels from economic history also fail to offer concrete clues. Widespread unemployment seen during the Great Depression could provide a glimpse into what the world’s financial markets could expect in terms of outcomes, but only go so far. The underlying causes for market upheaval are dramatically different than those that led to the stock market collapse in 1929. Granted, several conditions seen in 1929 exist today, such as stock market saturation, a drop-off in manufacturing and production, and ballooning consumer debt. But this time around, these factors didn’t directly serve as a catalyst for the market’s dive.

If we were to look for a more recent parallel, the 2008 recession doesn’t provide much more context either. So far, the COVID-19 economic downturn has been much smaller than the financial crisis 12 years ago. Banks are not overleveraged with bad debt to the same extent as they were in 2007, and have maintained a much healthier balance sheet ever since. No financial sectors are responsible for causing economic disruption this time around, unlike the implosion of the real estate market during the last recession.

The market’s novel reaction to COVID-19

Countries and economic blocs most affected by the pandemic have taken different approaches to forestall a financial crisis. These different approaches all have the potential to soften the blow of COVID-19’s economic damage; understanding which of these approaches work, how long they will need to be in effect, and how much time has to pass before we see if they’ve borne fruit is all to be determined though.

Washington’s rapid financial response to the pandemic injected billions of dollars into the economy, slashed interest rates to nearly zero, and provided a nominal amount of stimulus directly to the people. A billion-dollar relief program designed to help small businesses weather the damage to main street shopping during lockdowns distributed forgivable loans across the country. These initiatives have helped shore up the stock market in the nascent days of the pandemic, but it’s still unclear as to whether or not these efforts were enough to keep the gears of the economy moving.

In European Union member states, central governments have undertaken large-scale financial relief programs for individuals through direct supplemental payments. These efforts have supplemented lost wages from employers due to layoffs or furloughs, often up to 80% of an individual’s typical paycheck. The EU has earmarked €200 billion to lend to businesses, and another €240 billion in cheap credit for companies that need loans. So far, this is the largest COVID-19 response to date, totaling more than €3.2 trillion.

Central banks have moved quickly to help prop up an economy rattled by a truly unprecedented global event. Although it is yet to be seen if these efforts will work in the medium- to long-term, it’s possible that economists learned from the disjointed response to the 2007 recession and prioritized moving quickly this time around.

There will be more uncertainty to come

If the stock market’s reaction to COVID-19 seems unpredictable, that’s likely due in some part to the ever-fluctuating nature of the pandemic. Some of the hardest-hit countries are only now beginning to “flatten the curve” and slow the spread of the virus. Businesses are just beginning phased re-openings as well. The possibility of a second wave of infections looms large, especially as summer weather in the northern hemisphere compels those who have been stuck inside since March to go out and enjoy some summer sun.

Put more succinctly, there’s every likelihood that we’re only at the end of the beginning of the pandemic. The beginning of the end may be months away—or may not come until herd immunity is established or a vaccine is approved and has widespread distribution.

How to navigate a shaky market

Despite the nerve-shaking headlines about consumer confidence and economic consequences from COVID-19’s fallout, there are still opportunities for savvy investors to make the most of a difficult situation. The period of stock price saturation is, at the very least, on hold for now. That means there is an opportunity to buy top-tier stocks at a relative bargain as the bull run comes to an end. Stocks that were prohibitively expensive may now be a more attractive option, particularly if consumer confidence and unemployment figures rebound quickly.

Alternatively, the current uncertainty may also offer a good opportunity to seek out alternative investments in this bear market. Alternative asset classes, such as farmland, are a more stable alternative investing directly in the stock market. This kind of investment generates passive income with consistent returns, while also furthering the global good. Most importantly, farmland investing specifically offers protection against the market volatility that sends stock prices soaring and crashing, and makes dividends unpredictable. Although maturation periods may be longer, the protection from economic uncertainty in the wake of the global pandemic is a strong upside.