We started this year with some unpredictable global turmoil. The entire world is now fighting against the novel coronavirus pandemic that started spreading from China, later covering the vast majority of the planet. As a result, now the virus has been contracted by over 8 million people globally whilst the death toll nears a grim number of half a million. However, besides the human cost of the coronavirus pandemic, there is unprecedented economic pressure on every government around the world.
Even during the 21st century, we have navigated through a number of pandemics. From the Ebola outbreak to the swine flu, the world has survived many difficult situations with common efforts and joint work. There has not been the need for such radical and drastic measures in recent history, anywhere, and under no circumstances. So what makes the novel coronavirus infection so different? Why is it costing people lives, jobs, health, and freedom? What does it have that the swine flu or ebola did not? And most importantly, why is the impact of the virus so grim on stock markets and economies in all nations?
The one factor that makes COVID-19 stand out from the rest is its high reproduction rate. The R rate, as it is commonly referred to as, indicates on average how many people will contract the virus from one infected individual. The R rate is exceptionally high with coronavirus and stands at the natural mark of 3. However, with relevant manipulation and lockdown measures, the R rate can be reduced to the absolute minimum. For instance, the UK government has set the goal to keep the reproduction rate below 1 at all times, all across the country. This way, the virus will not be spreading any further, flattening the curve significantly.
As such, social distancing happens to be the only known and practiced way of fighting against the virus. For this very reason, utterly restrictive lockdown measures had to be introduced practically in all affected countries. Italy became the first major nation to ban mobility in all forms nationwide. Later, it was followed by others in Europe, Asia, and the Americas. This practically brought the economic activity to a standstill, forcing many companies to close down.
The stock market struggles throughout the crisis
From the very beginning of the pandemic, every statement made by national and international leaders, organizations and experts have been causing falls and surges in US stock markets. However, in the end, this has been a predominantly negative experience for the industry. The announcement of lockdown measures, Boris Johnson testing positive for COVID-19 and president Trump’s often confusing and appalling statements have made the stock market one of the least predictable financial sectors throughout the turmoil. As of now, there is a visible trend of gains slowly growing from post-COVID trauma. But how are S&P 500 or Nasdaq Composite seeing any positive signs amid the predictions of the worst economic downturn since the great depression?
The recovery of the US stock markets amid the nearing recession
The US stock markets have gone through something unique in early 2020. In February 2020, the US stock market was at the all-time high, thriving with positive outlooks and the optimism of even further growth. However, just a month from the 19th of February, the market went down to a devastating, grim mark. This has been said to be the fastest decline from the high point to the bear market.
What has happened to the US stock market in early 2020 is extremely clear. There was practically no certainty, with no valid information flowing in or out. The government in Washington was not ready to deal with the global pandemic, changing strategies way too often, sparking the feeling of the unstable environment among the US-based businesses. The companies were shut down and that impacted major corporations almost as equally. Big names keep shutting down key locations and branches to this very date.
However, the market seems to be back on track. The S&P 500 has recovered completely, going back to its pre-pandemic mark in late May. Nasdaq Composite, a key index with a bunch of tech firms listed, closed above 10,000 for the first time, showing the strong recovery from the total lockdown that lasted for almost 3 months. Other indexes have also gotten back to their original spots while others are exceeding expectations.
So why is it that during the anticipated major recession, the US stock market keeps thriving? Why is there so much even happening on the US stock market during such an economic turmoil? The answer is not simple, but there is one factor when it comes to reading the pattern of the US stock market.
The leading experts in the field say, that the stock market is the best indicator of what there is to expect for the economy on a broad scale. However, by no means is it a direct parallel and completely accurate representation of the economic development and dynamics. However, usually, the stock market falls sometime before the recession. It closely indicates what is to come a few months before the recession hits. Usually, the recovery starts three to four months prior to the end of the recession.
However, as we know for sure, the recession is yet to begin with its full force. We keep living in the global recession with the number of new coronavirus infections remaining at a constant rate in the United States. Therefore, the stock recovery now does not indicate the end of the recession. Rather, it shows that the lockdown measures are getting lifted globally and that we started understanding more about the virus.