Monthly report: COVID-19

March 29, 2020

Global financial markets have been in freefall since it emerged that COVID-19 was spreading rapidly across the world. Richard Dawson investigates the growing crisis that we will come to call the 2020 stock market crash

The COVID-19 outbreak has caused unprecedented disruption to the way we live, work and do business. No matter what your age, it is difficult to imagine any crisis that has so quickly transformed political, economic and social life. While the public health battle rages on and lockdown measures come into effect, the UK economy faces being effectively closed down for an as yet undefined period of time.

It’s an unprecedented scenario and one that the financial markets have taken a strong disliking to. The FTSE100 index of the UK’s 100 largest companies, for example, has lost around a third of its value in the last month. On March 12 alone, the index plunged by 10.87 per cent – the second-worst day on record.

Elsewhere in the financial system, the losses have been equally dramatic. The three main American indices, the Dow Jones Industrial Average, S&P 500 and NASDAQ-100 have been in freefall since late February, when the public health crisis first became an economic one.

From March 9 to March 16, the Dow Jones fell by an astronomical 30.7 per cent – well over 7000 points wiped off in just seven days. After sustaining huge losses of 7.8 per cent on March 9 and 10 per cent on March 12, hereby dubbed Black Monday and Black Thursday, the Dow dropped by 12.9 per cent on March 16.

Across Europe, markets have been especially pummelled. Single-day downward movements
of over 10 per cent have been recorded on all the major indices. On March 12, the FTSE100’s worst day so far, the French CAC 40 and Germany’s DAX fell by more than 12 per cent. In Italy, the European centre of the COVID-19 outbreak, the FTSE MIB dropped by 16.92 per cent, the single worst day in its history.

These are not only the most extreme market movements since the 2008 global financial crisis; they are the most extreme for a generation. The only precedent for the kind of single-day percentage drops that we’re seeing is October 19 (Black Monday) 1987, when the Dow Jones fell by 22.6 per cent.

Although we are only in the early stages of the COVID-19 pandemic, the 2020 stock market crash, as it will go down in history, is well underway.

The crash is rooted in the unique challenge of how to price companies amid both a supply and demand shock to the global economy. The COVID-19 pandemic has disrupted supply chains and eviscerated market demand in equal measure. This is unprecedented in macroeconomic terms. The first signs of trouble came when the price of oil collapsed on March 9 after Russia and Saudi Arabia failed to agree to production cuts to support the commodity. On March 11, US President Donald Trump then announced a temporary 30- day travel ban against Europe, sending the value of beleaguered travel companies through the floor.

Over the next week, Governments all over the world started implementing social distancing measures to limit the movement of people and contain the spread of the virus. Not long after, the profit warnings started flooding in from retail, leisure and hospitality operators.

In the dark months of the 2008 financial crisis, which many economists do not believe we have fully recovered from, global stock market losses totalled something like 49 per cent. We are already well past 30 per cent in this crisis, and that’s only since late February.

Ever since the start of the outbreak, central banks, finance ministries and monetary institutions have been trying to soothe the markets and support businesses with fiscal stimulus measures that are getting bigger all the time.

And yet on March 18, the day after the US Federal Reserve and the UK Treasury had announced a combined $1.5 trillion economic relief package, the markets once again tumbled in a sign that investors do not think this will be enough.

John Dance, founder of independent stockbroker Vertem Asset Management, describes the current situation as “very difficult.”

He says: “Unfortunately things have gotten much worse in the market. Understandably, there just aren’t any buyers at the moment and some investors are reacting to negative news that the rest of the
market had already priced in, perpetuating the declines.

“The worry with the Treasury and Bank of England action so far is that, while obviously being significant in size, is potentially not ‘instant’ enough to assist the most affected sectors, still leaves many sectors and individuals exposed and could be open to manipulation i.e. businesses draw down on funding but still lay off staff and reduce their costs.

“However, further detail and evolutions will be forthcoming, potentially on a day-to-day basis, and things could change.

“Investors should take comfort from the fact that, not just in the UK but globally, Governments and central banks are clearly willing to take significant action to reduce the economic impact and even the length of the impact, as much as possible.”

It looks as if investors could indeed warm to the prospect of this global “whatever it takes” approach to monetary and fiscal policy. The Dow Jones for example recorded its best day since 1933 on March 24, surging more than 11 per cent as a $2 trillion stimulus package looked like passing through the US Congress.

But markets remain extremely volatile and increasingly, it feels like little progress will be made tackling the economic crisis until we get the public health crisis under control.

Until we have some indication of how long these social distancing measures will be in place, it is difficult to know what, if any, amount of money will get us out of this.

North East Times recognises that the COVID-19 situation, responses and impact are ever changing. This information was correct at time of print (March 25).

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