Markets

Impact of a second wave of COVID-19 on global markets

Although the first coronavirus case dates back to November 2019, global markets seemed unaffected until mid February 2020. In March 2020, the World Health Organization declared the COVID-19 outbreak as a pandemic and global markets went into panic mode. The Federal Reserve promptly lowered interest rates to near zero and set up a series of emergency facilities. In an attempt to avoid a liquidity crunch, the Fed also made $1 trillion in overnight repos available at auction every day and an additional $500 billion in longer-term repos available at least once a week. Simultaneously, the Senate passed a $2.2 trillion emergency relief bill to limit the financial trauma inflicted by the coronavirus crisis, according to the Washington Post. These measures restored confidence in the markets and global equity experienced a swift recovery. But there is much talk about a second wave. Several European countries such as France and the Netherlands have recently had the highest numbers of infections they have ever recorded.

COVID-19: confirmed cases by country as of 28 September 2020

Impact of first wave ON GLOBAL EQUITIES

To better understand the impact of a second wave of coronavirus on global markets, let’s first explore the impact of the first wave on global markets in more detail. As seen in the graph below, US markets were worst affected by the crisis and Chinese markets were affected the least. From the 14th of February until the 20th of March, the S&P 500 fell over 55%.

Source: Aswath Damodaran

Nevertheless, the US market was the fastest to recover. The harsh measures taken by the Federal Reserve and Congress played a vital role in restoring investor confidence and the S&P 500 saw a swift recovery. In April alone, the Fed’s securities holdings increased by about $1.2 trillion. The Fed has financed all of these activities by expanding its balance sheet, which surpassed its all-time high by March 2020 and exceeded $7 trillion by May 2020, according to a report. As of September 2020, the S&P 500 is trading near record levels.

Source: Aswath Damodaran

Looking at each sector

While the looking at entire markets can give a picture of how equities are doing, looking at sectors can provide much more insights. More than 43 thousand stocks worldwide are classified into 11 sectors. The table below shows the performance of each sector from the 14th of February until the 20th of March 2020.

Source: Aswath Damodaran

Clearly, the worst sectors are energy, financials and real estate. The significant decline in energy stocks is also linked to the Russia–Saudi Arabia oil price war. As expected sectors that are not cyclical and more resilient to economic downturns such as consumer staples, health care, communication services, utilities and information technology have performed better during the crisis.

According to Aswath Damodaran, “Of the eleven sectors that S&P uses to classify stocks, six now have positive returns over the crisis period, and technology has now overtaken health care as the best performing sector.” From the 14th of February until the 14th of August 2020, IT stocks rose on aggregate over 11%. Financials, on the other hand, have declined over the same period over 15%. This shows that there are clear winners and losers in the COVID-19 crisis and helps us better predict the winners and losers of the the second wave of COVID-19.

IMPACT OF FIRST WAVE ON US Treasuries

The major drop in rates occurred in the first few weeks of the crisis (as seen in the graph below). During its surprise meeting on the 15th of March 2020, the FOMC decided to cut interest rates to near zero.

IMPACT OF A SECOND WAVE ON GLOBAL EQUITIES

Statistics are signaling a second wave of COVID-19 especially in European countries. Despite some market declines witnessed in early September, global markets still seem unalarmed. If March 2020 taught us anything, it’s that the U.S. government and U.S. Federal Reserve will do whatever it takes to stabilize the markets.

It would be foolish to argue that I can predict the exact movement of the stock market but it would be just as foolish to forget the lessons learned from the first wave of COVID-19. During the coronavirus crisis capital-intensive, rigid firms that have large amounts of debt were worse affected than firms that are capital-light and flexible. Especially the FAANG -Facebook, Apple, Amazon, Netflix, and Alphabet (parent company of Google)- stocks have been responsible for the majority of the returns among technology companies and laid the grounds for the global market recovery.

On a final note, it is worth remembering that investors hate uncertainty. During the first wave of the coronavirus a lot was unknown and there was no data to estimate the severity of the outbreak. This won’t be the case during the second wave. So, be cautious but don’t be alarmed!

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