Covid-19 Fears and Stock Market Behavior

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SimpleGift
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Covid-19 Fears and Stock Market Behavior

Post by SimpleGift » Tue May 26, 2020 3:38 pm

It's a little early to be writing the history of the Covid-19 pandemic and stock markets, but it is instructive to observe the progression of daily cases in the United States and China this year compared with the behavior of their respective stock markets (charts below).
  • Image
    Data sources: Covid-19 cases from OWID; S&P 500 daily prices from FRED; China stock prices from MarketWatch.
Clearly stock markets are forward looking and it appears that, in line with other event-driven bear markets in history, after the initial sell-off and once stock investors are able to get a good sense of the overall scope and duration of the crisis, market prices begin to embark on the road to recovery.

Granted, things could look different with a recurrence in the fall, but initial fears seem to have waned. Thoughts?
Last edited by SimpleGift on Tue May 26, 2020 5:11 pm, edited 2 times in total.

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Re: Covid-19 Fears and Stock Market Behavior

Post by jebmke » Tue May 26, 2020 3:44 pm

Don't know about China but I suspect the FED expansion of their balance sheet from $4.3 trillion to over $7 trillion in a little over a month might have contributed.
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Re: Covid-19 Fears and Stock Market Behavior

Post by EnjoyIt » Tue May 26, 2020 3:51 pm

I also find it interesting how in early February when the Asian market crashed, the US market was still on the rise.

Thanks for sharing.
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Re: Covid-19 Fears and Stock Market Behavior

Post by Elysium » Tue May 26, 2020 4:19 pm

Yes, for now risk has been priced in, and the Fed actions indeed were the critical factor in all this. Unless there is a surprise twist in this story, the recovery should hold up. Cautious optimism is what the market is displaying.

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Re: Covid-19 Fears and Stock Market Behavior

Post by Clever_Username » Tue May 26, 2020 4:50 pm

Economically, I suspect this disaster might be the easiest to get out of. It isn't like 2008 when the value of some real assets plummeted and no one was sure if they'd come back.

If your business was showing signs of being viable (or better) three months ago, that seems like a great case for a bank to want to make the loan when you reopen. It's a business shown to be viable. I saw an article recently where a former Lakers player said he set aside a large sum of money (I want to say it was $100M or so) to lend to minority-owned businesses as they reopen post-Corona. In addition to the obvious good PR, I think that's probably a good investment -- I bet he isn't distributing the money randomly, and I bet a lot of recipients fit into my previous statement about viable businesses when a pandemic isn't happening.

If I'm right, I can't imagine that the big shots at major investment firms haven't already figured this out.
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Re: Covid-19 Fears and Stock Market Behavior

Post by SimpleGift » Tue May 26, 2020 4:52 pm

Interesting to note that the 2003 SARS epidemic, though it only lasted a few months, saw almost exactly the same stock market pattern in relation to the progression of cases as observed in the U.S. and China in the OP (chart below).
  • Image
    Source: SIM, showing S&P 500 price only.
There's an initial sell-off well in advance of the peak of cases, then as investors better understand what the overall scope of the crisis is likely to be, the markets start to cautiously recover. In the financial history books, this may come to be known as the stock market's "pandemic pattern." :wink: Though we can hope it isn't a regular occurrence.

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Re: Covid-19 Fears and Stock Market Behavior

Post by iceport » Tue May 26, 2020 5:07 pm

This might be a little off topic, but I couldn't help noticing how different the two bar graphs are! In one country, the cases rose, peaked and fell back to very low levels in the span of a single month. One month! In the other country, we're at 2-1/2 months and still going strong — with practically no let-up in sight. The vertical scales reveal an even more dramatic disparity.

I doubt the market will be forever immune from such a prolonged pandemic experience in one of the world's largest economies.
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Re: Covid-19 Fears and Stock Market Behavior

Post by FIREchief » Tue May 26, 2020 7:29 pm

It's also good to remember that the US market was in crazy high record territory before this virus became real, and many were already expecting a correction (or larger drop). We're almost out of correction territory from the record high! 8-)
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Re: Covid-19 Fears and Stock Market Behavior

Post by firebirdparts » Tue May 26, 2020 7:59 pm

SimpleGift wrote:
Tue May 26, 2020 3:38 pm
Granted, things could look different with a recurrence in the fall, but initial fears seem to have waned. Thoughts?
Fear of the disease has certainly waned, but fear of failure-to-earn-money has not yet begun. Some older folks I know are taking the disease pretty seriously, and I guess they will just continue to do so. I think as the business failures, mortgage defaults, and bankruptcies drag on and on, it'll wear people down a bit. We'll see.
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Re: Covid-19 Fears and Stock Market Behavior

Post by SimpleGift » Tue May 26, 2020 8:06 pm

EnjoyIt wrote:
Tue May 26, 2020 3:51 pm
I also find it interesting how in early February when the Asian market crashed, the US market was still on the rise.
Yes. The "pandemic pattern" of the stock market (i.e., a deep sell-off and the start of recovery happening well before the peak of cases) was almost exactly the same in both the U.S, and China, but the timing corresponded to the local progression of cases in each country.

If there is a predictable pattern to stock market behavior in a pandemic — as there appears to be — this should reinforce the "buy-hold-rebalance" strategy of passive investors. Also, investors might be further reassured that event-driven bear markets caused by pandemics have tended to be relatively short-lived.

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Re: Covid-19 Fears and Stock Market Behavior

Post by iceport » Tue May 26, 2020 8:22 pm

SimpleGift wrote:
Tue May 26, 2020 8:06 pm
If there is a predictable pattern to stock market behavior in a pandemic — as there appears to be — this should reinforce the "buy-hold-rebalance" strategy of most passive investors. Also, investors might be further reassured that event-driven bear markets caused by pandemics have tended to be relatively short-lived.
Doesn't the pattern you've perceived involve all short-lived pandemics? Without trying to undermine the prudence of a buy-hold-rebalance strategy, I think short-lived market downturns correlating to short-term pandemics won't be very relevant if we end up in a prolonged pandemic, as currently appears distinctly possible — if not likely. Looking at the blue bar graph, I don't see anything like a tail end yet, do you?
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Re: Covid-19 Fears and Stock Market Behavior

Post by SimpleGift » Tue May 26, 2020 8:37 pm

iceport wrote:
Tue May 26, 2020 8:22 pm
I think short-lived market downturns correlating to short-term pandemics won't be very relevant if we end up in a prolonged pandemic, as currently appears distinctly possible — if not likely. Looking at the blue bar graph, I don't see anything like a tail end yet, do you?
No, you're right, the U.S. is a long way from the tail end of the daily cases, even though the peak has apparently passed and the daily trend is solidly downward.

Going forward, the market will be responding mostly to the longer-term economic impacts from the pandemic, I expect, which will be an uncertain and unpredictable course. The OP charts and observations were just about the initial panic reactions and recovery of stock markets in response to the outbreak.

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Re: Covid-19 Fears and Stock Market Behavior

Post by iceport » Tue May 26, 2020 9:20 pm

SimpleGift wrote:
Tue May 26, 2020 8:37 pm
iceport wrote:
Tue May 26, 2020 8:22 pm
I think short-lived market downturns correlating to short-term pandemics won't be very relevant if we end up in a prolonged pandemic, as currently appears distinctly possible — if not likely. Looking at the blue bar graph, I don't see anything like a tail end yet, do you?
No, you're right, the U.S. is a long way from the tail end of the daily cases, even though the peak has apparently passed and the daily trend is solidly downward.

Going forward, the market will be responding mostly to the longer-term economic impacts from the pandemic, I expect, which will be an uncertain and unpredictable course. The OP charts and observations were just about the initial panic reactions and recovery of stock markets in response to the outbreak.
Okay, thanks for the clarification. With that, I reread the OP and I do agree, the initial fears have waned. I'm fairly pessimistic in general about the scope and duration of the crisis though, and that undoubtedly affects my market expectations for the next year or two.

But if I were to try to find reasons for optimism it's in the steepness of the curve we're on in learning how to deal with the pandemic. Great strides in understanding are being made in a very short period of time. That includes gaining experience with what works in slowing the spread. I live in what was for a time the global epicenter of the pandemic, along the North Atlantic coast. The lock-down measures imposed here were among the strictest in the nation, and cell phone data suggests the vast majority of us complied with them. And while it didn't happen very quickly, eventually the spread came under some degree of control. So if worse comes to worst, we at least have this experience to guide us.
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Re: Covid-19 Fears and Stock Market Behavior

Post by Nate79 » Tue May 26, 2020 9:48 pm

I would look at number of deaths or perhaps the infection rate and not the total number of new cases because the number of new cases it is heavily influenced by the number of daily tests.

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