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How COVID-19 has Impacted the Market and Investing Potential

Venture North Group > investing > How COVID-19 has Impacted the Market and Investing Potential
market and Investing

As coronavirus (or COVID-19 or novel coronavirus) spread began its march across the globe, many hoped it would be a flash in the pan and then retreat as quickly as it came about. Six months later, the realization has solidified that this was not meant to be. COVID-19 began as a regional crisis in China’s Hubei province;, particularly in Wuhan. From there, it spread from country to country and continent to continent until it went from an unfortunate outbreak to a global pandemic. Global economies have felt the strain of COVID-19 as well. Equities have plummeted, and market volatility has rocketed upward all around the world.

In the United States, recent market volatility levels rival or surpass many of the historic lows seen in recent years. They have surpassed what we saw in December of 2008 and October of 1987. They have even surpassed the recession we experienced in late 1929 and into the 1930s. These highly unstable conditions have made investing risky, and many investors and venture capital companies are keeping their money closer and not taking significant risks when it comes to investing in new business ventures.

COVID-19 is not the first infectious disease outbreak to spread around the world, so how do the recent developments in the economy and stock market behavior compare to previous events here in the United States and beyond?

How Has COVID-19 Compared to Past Outbreaks?

There has been a lot of research over the past few months concerning COVID-19 and its impact on the global markets. Much of the analysis suggests that when compared to other outbreaks such as MERS, SARS, and others, COVID-19 is having an unprecedented impact in the markets. Similar research shows that since 1985 when the HIV/AIDS epidemic reached its peak, no other infectious disease outbreak has had more than a minor effect on stock market volatility in the United States. If you look back even further to the 1900s, there are no discernable instances where pandemic related events attributed to significant movements in the daily markets. This includes the Spanish Flu of 1918-1920, which killed approximately two percent of the world’s population.

In stark contrast, COVID-19 has been at the hub of many of the market’s most significant movements since the middle of February. In addition, the 2020 stock market crash, as it is being dubbed, is widely linked to the startling declines experienced by all markets worldwide. On March 9, now known as Black Monday, the markets suffered the worst drop since the great recession in 2008. Three days later, stocks fell more than nine percent. By the time March arrived, global stocks had seen a downturn of at least twenty-five to thirty percent. Goldman Sachs warned on March 20 that the United States GDP would shrink by at least twenty-nine percent for the second quarter of 2020. All of this has been attributed to the COVID-19 pandemic and rising fears of potential global economic shutdowns due to the economic impact of the virus.

COVID-19’s Impact on Global Market and Investing

Why has COVID-19 had such a power and lasting effect on the stock market when many of its processors were merely a blip on the radar? It is clear that the current COVID-19 pandemic has significant and grave implications or the economy (both globally and here in the United States) as well as for the public health. Part of the explanation lies with the pandemic itself. COVID-19 has swept across the world in a very short amount of time. It is a severe illness that carries with it a mortality rate that deserves consideration. No, it is not as high as some other illnesses in history have been. Still, it is crucial to consider the overall number of deaths from this illness has happened in a matter of weeks-not throughout the year as with other diseases such as the Flu. There is also the consideration of how easily COVID-19 can be spread and the unknowns associated with a vast range of symptoms, which could potentially signal an active case of COVID-19.

Interconnected Worldwide Economy

A second explanation hinges on the interconnectedness of the modern economy. Unlike the times of previous epidemics and pandemics, we are now indeed a global economy. When a country on one side of the supply chain experiences a massive downturn on production or export as happened in China in December, then the other end of the supply chain will suffer from this impact. On the receiving end, production will become limited or cease, the stock will dry up, and the economy will begin to suffer as the quantity of imports and exports decreased. We are a society of long-distance travel and in many international countries, cross border commuters. Other common elements in our current economy include reduced communication costs, reduced transportation costs, reduced (until recently) tariffs, dense supply chains, and easily interrupted just in time supply chain models.

Additionally, the structure of the economy, market and investing has shifted with time to services. Many of these services involve or necessitate face to face interactions. COVID-19 has brought about the necessity for social distancing and stay at home orders which have been put in place to slow the spread of the disease and to protect society as a whole. For many states and economies, the introduction of these orders and their respective mandatory business closures was abrupt and without a lot of warning. Such orders, whether voluntary or involuntary, have brought about a sharp drop in demand for businesses that are part of the face to face service sector.

A third explanation speaks to behavioral and policy reactions to the COVID-19 pandemic. The containment policies put in place to “flatten the curve” and slow the spread of the COVID-19 virus had directly and significantly reduced the flow of labor to businesses. It has also reduced the flow of customers and economic flow into the businesses and the local economy. As a result, there has been an equally sudden and extensive reduction in the output of goods and services. During previous outbreaks of infectious disease, containment measures such as social distancing, stay at home orders, and widespread closure of businesses and other places where groups could gather such as schools and entertainment facilities were not thought of or at the very least not put in place. As the COVID-19 pandemic worsened, containment efforts became much more extensive and widespread than ever seen before; even during the Spanish Flu. For the same reasons, there has been a more extensive and detrimental effect on the modern economy. This is likely the most significant contributor to the COVID-19 impacts on the global markets.

As of the close of the demands on Friday, April 24, there was a small upward trend in the market. They remain well below their closure numbers from February 12 when they closed at an all-time high. Reasonable expectations put a timeframe of months if not over a year before the markets return to the glory that was just a few months ago. It will take time and the return of consumer spending and consumer confidence, which both require the economy to reopen. This cannot happen until it is medically safe to do so. Consequently, we are in a time of significant flux and unknown territory for investors in all areas of the market.

This also adds a considerable challenge to entrepreneurs who are looking to (or had already started the process of) secure funding capital to get their business off the ground. At times like these, when investors may be harder to come by, having a venture capital firm such as The Venture North Group in your corner can help take some of the guesswork out of the fundraising process. We can help you find investors who are looking to help potential businesses get started!

 

Resources

 

https://insight.kellogg.northwestern.edu/article/what-explains-the-unprecedented-stock-market-reaction-to-covid-19

http://policyuncertainty.com/media/StockMarkets_COVID.pdf

https://www.foxnews.com/health/the-5-deadliest-disease-epidemics-in-the-united-states

https://en.wikipedia.org/wiki/2020_stock_market_crash

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