Can Stock Markets Ignore COVID-19 for Long?

Updated on June 9, 2020
Babu Mohan profile image

I am a marketing professional holding a postgraduate degree in management. I am an active retail investor in Indian stock markets.

Bull or bear?
Bull or bear? | Source

The world started hearing about coronavirus in January, that was wreaking havoc over a populous Chinese town called Wuhan. By early March 2020, many people were worried that it could become a global pandemic. The entire globe has been on a partial or a complete lockdown since then. All major continents like Asia, Europe, Americas and Africa have been ravaged by the pandemic.

Many stock markets were at their peak levels in February 2020. It is not a surprise that few of them crashed as much as 40% from their peak levels in March 2020 following the pandemic. A global relief rally followed helping many markets to recoup much of their earlier losses (as on 7th June 2020).

Indices With a Gain of 20% or More From March Lows

  • DJIA (USA)
  • FTSE (UK)
  • CAC (France)
  • Nikkei (Japan)
  • NIFTY50 (India)
  • ASX200 (Australia)

China, the world's second biggest economy, neither had a serious fall nor a dramatic recovery like the rest of the markets did.

Factors Driving the Stock Market Rally

Given below are the key factors driving the rally.

  1. A belief that what goes down must come up.
  2. A hope that a vaccine will end this pandemic.
  3. Every previous market crash was followed by periods of glorious returns
  4. There is no other alternative to stock market investments.
  5. Liquidity boosting stock markets

It is time to look at each of these factors with a dispassionate approach. Towards the end, I will do crystal ball gazing in an attempt to predict the future.

The threat from coronavirus is real
The threat from coronavirus is real | Source

1. What Goes Down Must Come up - Not Always

Many investors assume that a correction is always an opportunity to buy. They base their assumption based on the stock market crashes in the last 3 decades. The dotcom bubble that burst in 2000 was followed by a boom period. The subprime crisis that triggered the 2008 crash was followed by a decade long bull market.

Similarly, many believe that the COVID-19 led correction in March 2020 should be followed by a boom period. COVID-19 is not part of a normal economic or business cycle. It is a black swan event that changes the way we approach life and business.

Given below are the genuine concerns arising out of COVID-19 outbreak.

  1. Health concerns / higher death rates
  2. Unprecedented unemployment crisis
  3. Many small and medium businesses may not withstand extended lockdowns.
  4. Drop in consumption levels.
  5. Social unrest.

In this backdrop, one cannot assume the impact of COVID-19 to be the same as a dotcom bubble or the subprime crisis. It could be worse.

2. Will a Vaccine End the Pandemic? Less Likely

I am not a scientist or a medical professional. Even as a commoner, I know there are so many viral diseases for which vaccines are not available. With due respect to the sincere efforts of many scientists and research professionals around the world, an effective vaccine looks less likely to arrive at the right time.

That said, I would be the happiest person if there is a breakthrough in COVID-19 vaccine. The vaccine would be a lifesaver for millions around the world. Even then, it would take many years for the economy to recover having slipped into a recession.

3. Every Previous Crash Was Followed by Boom - This One Is Different

It is true for the dotcom crash and the subprime crash. Those were crashes fueled by excess greed. When the greed got deflated, markets crashed only to recover later. Greed and fear are parts of business or economic cycles.

The COVID-19 crash was not a result of excess greed or fear. This is real. Economic activity has come to a grinding halt in many countries. Unemployment is soaring. Consumption is dropping. Most of us cannot visit a friend, shop, travel or many of the things we love. The world has changed and for the worse.

4. There Is No Other Alternative

Investors have very little option to look beyond stock markets in a low interest rate regime. A bank deposit, government bond or real estate cannot match the returns given by stock markets in the long run.

I share this belief that stock market returns would continue to be better than bank deposits or real estate. Stock market is still a great option for a long-term investor with a 10 year time frame.

5. Liquidity Boosts the Stock Market - Not Forever

Liquidity can always propel stock markets heigher. Liquidity combined with a drop in interest rates is like a performance enhancement drug to the stock market. Low interest rates would not motivate one to keep their money in bank deposits. They would look at stock markets for better returns.

A performance boosting drug may help an athlete win once or twice. But once he is caught, it would be the end of his sports career. Liquidity injected by central banks all over the world is the performance boosting drug keeping the stock markets up. It would not last long. A liquidity induced bubble would pop.

The new normal is rooted in fear.
The new normal is rooted in fear. | Source

Crystal Ball Gazing

What is the worst-case scenario in case of another market crash? Will markets touch the previous lows in March or go even lower? Most countries have to shut down economic activities. In a lockdown, both the supply and demand sides of the economy are impacted. This would cause a drop in the world GDP, corporate profits and stock prices.

There is also the danger from the virus itself. We do not know the extent of damage this virus could cause or the duration of the pandemic. It may wreak havoc for another two years or suddenly disappear in a month. My guess is as good as anyone else’s.

In such a scenario, most markets should retract 50% from their historic highs. This would translate to 15,000 for DJIA and 6,000 for NIFTY. The trigger for the crash would be the corporate results for the quarter ending June 2020. Since the quarterly results would be declared in July and August, one can expect the next big crash to begin then.

Recommended Strategy

Do not make any fresh investments now. It is better to hold as much cash as possible to invest in the next crash. Should you consider trimming down some portion of your portfolio? It is not a terrible idea, assuming there may be a crash. But stock prices can be unpredictable. The prices may rise 20% after you sell or decline 20% after you buy. It is the risk that makes the investments exciting.

I have trimmed my investments to a bare minimum and I am planning to reenter the market by August 2020. I may pick up stocks at an attractive bargain or will end up paying more if the stock markets continue to rise. Only time will tell if my strategy has worked.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

Please leave your valuable comments.

    0 of 8192 characters used
    Post Comment
    • Babu Mohan profile imageAUTHOR

      Mohan Babu 

      7 days ago from Chennai, India

      Thank you, JC Scull for your valuable comments.

    • JC Scull profile image

      JC Scull 

      7 days ago from Gainesville, Florida

      Very good article.

    • Babu Mohan profile imageAUTHOR

      Mohan Babu 

      4 weeks ago from Chennai, India

      You are right, Liz. Various countries are facing a certain recession following the pandemic. But the markets were behaving as if they were disconnected from the real economy.

    • Babu Mohan profile imageAUTHOR

      Mohan Babu 

      4 weeks ago from Chennai, India

      Yes, Anbazhagan. It is difficult to do a short-term prediction about markets. This article is meant to remind investors about economic realities and overvaluation following the pandemic.

    • profile image

      Anbazhagan 

      4 weeks ago

      Thank you. Nice one. But the market so unpredictable. Lets wait and watch.

    • Eurofile profile image

      Liz Westwood 

      4 weeks ago from UK

      This is an interesting and very relevant article. It will be fascinating to watch the stock markets over the next few months as countries and businesses battle with recession in the wake of COVID-19. Who can predict the outcome with stocks?

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://maven.io/company/pages/privacy

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)