The Global Coronavirus Pandemic Has Roiled World Markets, But History Indicates That All May Not Be Lost
As the COVID-19 pandemic began to take hold across the globe between February and March of this year, the S&P 500 Index fell nearly 34%.
You read that right, the index lost more than a third of its value in just under a month, and that represents the sort of “volatile economy” which made investors scream in agony. But history offers us some comfort in terms of what the markets can expect going forward.
As nations came to grips with the reality of the pandemic, health officials began to institute efficiencies and strict measures to save lives and protect the health of citizens.
An unfortunate consequence of most of these measures has been the cost to world economies.
A wide swath of companies simply stopped – or were forced to stop – making products or delivering services. As consumers were faced with a fearsome choice between staying home or heading out to make necessary purchases, they chose the former path, and as a result, revenues for enterprises abruptly tumbled to near nothing.
And in reaction, companies were compelled to cutting costs immediately by reducing the number of their employees, abandoning plans for investment and grabbing for any other cost-cutting measures they could. All the moves to save money were essential to allow businesses to repay debts and avoid going out of business entirely.
By March the most severely hit industries such as airlines, hotels, cruise lines and tourist dependent sectors were asking for a government bailout, and as time has gone on, the risks of them going bankrupt have rapidly increased.
As a result, industries that were considered relatively stable as late as February of this year saw their share prices decline by as much as 60% in less than one month.
But if history is any bellwether, pandemic induced losses are likely to rebound.
In reviewing the SARS outbreak back in 2003, the S&P returned 26% in 2003 alone and an additional 9% in 2004.
During the MERS outbreak of 2012, the S&P recovered some 13% in 2012 and ratcheted up another 29% during 2004 after suffering an initial drop of 34%.
If those historical results are repeated, it may be safe to assume that, either by the end of 2020 or the beginning of 2021, the markets should start to see somewhere around a 21% return by the S&P.
On a more positive note; in 2008 the passage of the Dodd-Frank Act and its requirement that banks to undergo stress testing and maintain a heftier capital cushions will mean that banks are part of the solution this time around.
What it should mean to investors is that contrary to the initial inclination to panic and sell off stocks or pull money from the bank to buy gold (seriously, please don’t start buying gold), money should be safe over the long haul.
So what are banks doing today to deal with the economic fallout of the pandemic?
To provide economic support and help stabilize financial markets, central banks and governments have had to announce a record amount of monetary and fiscal stimulus packages.
While this may not be everything necessary, we decided to list out a few positive measures that stood out to us:
- During two emergency meetings the Federal Reserve cut interest rate from 1.75% to 1.25% and consequently to 0.25%;
- The FED also announced that it would purchase unlimited amounts of treasuries and mortgage-backed securities, in essence launching unlimited quantitative easing;
- The US government introduced 2 trillion stimulus package to help businesses and individuals in the USA cope with crisis;
- The European Central Bank (ECB) announced a Pandemic Emergency Purchase Program with €750 billion available for the purchase of public securities;
- Germany launched €750 billion in fiscal packages