Coronavirus: what is the impact on the stock market?

Understanding the potential S&P 500 recovery rate

Making a prediction about the S&P 500’s rate of recovery following the coronavirus crisis can be challenging, as there are many variables to consider. However, we can look at historical events and identify the statistical likelihood of the index rebounding within a certain amount of days.

Firstly, is there is a correlation between the past speed of market sell-offs and the subsequent rate of recovery? The short answer is no, because markets generally continue to fall after the initial 20% sell-off.⁴ However, it would make sense to look at percentage moves to understand how losses can be regained.

We start by looking at the nine times the S&P 500 fell by more than 20%.

Then, we plot the points on a graph and find a trendline.

Therefore, if we assume the 33.9% sell-off of the S&P 500 due to Covid-19 is the maximum loss, we can use the below chart to see it could take about 693 days (±48 days) until recovery.

Remember that this figure is the statistical probability of a recovery based on past events. There is a currently a consensus that the pandemic will only end when the global population has established herd immunity. Data that points to a larger infection rate without a significant increase in critical cases or mortality rates could be a sign of the market recovering.

Coronavirus outlook

Central banks around the world have been implementing stimulus packages in an attempt to lessen the impact of the pandemic on the economy. If the banks succeed, there could be a turnaround in the stock markets even if Covid-19 continues to spread.

Interestingly, most previous crashes were preceded by significant increases in bond yields. Further, as the bond yields suffered a decline, so did the stock market. And when they started advancing again, the market started to reverse. Recently, US, UK and European bond yields were pushed to record lows as global stock markets suffered due to fears that Covid-19 would spread further. This has increased the demand for safe-haven assets even more.

What could happen if the situation worsens?

If there is no turnaround, and a vaccine or cure is not found for Covid-19, the markets may continue to decline despite stimulatory efforts by central banks. During the 2008 crash, governments weren’t able to put control measure in place effectively and the S&P 500 fell 26.2% even after measures were implemented.

What could happen if the situation improves?

If a cure for coronavirus is discovered, there might be an improvement in the markets as economic activity starts to resume as normal. If the S&P does not go beyond the current low, it could take between 491 and 2458 days for the market to recover.²

Coronavirus and unemployment

The US was hit by one of the worst unemployment crises in history due to the Covid-19 outbreak. In March 2020, the unemployment figure exceeded 6.6 million – up from 230,000 over the same period in 2019.⁵ The reason for the sharp increase was the millions of people who lost their jobs in the retail, travel and restaurant industries.

The UK’s unemployment rate increased from 3.9% to 5.2%, wiping out years of improvement in this area.⁵ Similarly, Europe reported more than one million job losses in just two weeks.⁶

Assets most affected by the coronavirus outbreak: what can I trade?

• Stocks: Most stock prices have tumbled due to lower demand for the products and services. This has created plenty of opportunity for short-sellers to benefit from shares that are nose-diving. Overall, there was a dip in share trading activity between February and March 2020
• Indices: Popular indices have all been heavily affected by the outbreak, some crashing by record amounts. This huge volatility is likely to be here to stay as the economic fallout of this global pandemic plays out. Indices saw a huge surge in trading activity in the month that Covid-19 started affecting the markets
• Commodities: The gold price has been volatile as markets anticipate lower inflation for months to come. As for oil, Covid-19 and the price war meant that supply and demand were completely out of sync, almost guaranteeing a continuation of oil price volatility. The amount of commodity trading activity almost doubled from February to March 2020
• Forex: Currencies have suffered due to the lack of tourism and consumerism forced by various lockdowns. In fact, GBP has fallen to its lowest level since 1985. USD remains steady due to its safe-haven appeal, and there was a flurry of USD trading activity over this time

Learnings from previous market crashes

If history is our guide, it is clear that bear markets don’t reverse overnight. However, the coronavirus crash is not like any crash we’ve seen – considering that it was not caused directly by the bursting of a bubble or a debt crisis. In other words, a market crash can come when it is completely unexpected.

Further, any super crash will have a ripple effect. Normal economic activity cannot resume, company earnings are affected, real estate suffers, and travel and tourism come to a halt.

How to invest in companies affected by Covid-19

You can trade markets that are rising or falling in price due to the coronavirus crisis, or invest in the shares of companies that are doing well. With IG, you can speculate on the price of assets with derivates such as CFDs.

Footnotes

¹Prior to the formation of the S&P 500 in 1957, Standard and Poor's published a 90-stock index, computed daily, which is used for the 1929 crash in this data set.
²As at 23 March 2020, using S&P 500 market close data, excluding intraday highs and lows.
³Based on the average rate of market recovery of previous technical recessions.
⁴The required percentage to justify a technical recession.
⁵Macrotrends, 2020
⁵Financial Times, 2020
⁶Euronews, 2020