THE PANDEMIC STOCK MARKET There are three separate phases of the puzzle in the U.S.: the 3.1% rise in the S&P 500 from
no statistical analysis of such events’ market impact. The beginnings of lockdowns in late January in China received scant attention in the world press. The disease caused by the new coronavirus didn’t even have a name until February 11, when the WHO christened it COVID-19. In the weeks before February 19, public attention to longstanding problems such as global warming, secular stagnation, or debt overhangs were fading. President Donald Trump’s impeachment trial, which ended February 5, still dominated talk in the U.S., and many politicians apparently still found it counterproductive to raise alarms about a hypothetical new enormous tragedy looming. The second phase began when the S&P 500 plummeted 34% from February 19 to March 23, a drop akin to the 1929 stock market crash. Yet, as of February 19, there had been only a handful of reported COVID-19 deaths outside of China. What changed investors’ thinking over that interval was not just one narrative, but a constellation of related narratives. Some of the new news was nonsense. On February 17, a run on toilet paper in Hong Kong was mentioned for the first time and became a highly contagious story as a sort of joke. Of course, the news about the spread of the disease was becoming more international. The WHO dubbed it a pandemic on March 11. Internet searches for “pandemic” peaked in the week of March 8 to14, and searches for “coronavirus” peaked in the week of March 15 to 21. It appears that in this second phase, people were trying to learn the basics about this
the beginning of the coronavirus crisis, on January 30, to February 19 – the 34% drop from that date until March 23 – and the 40% upswing from March 23 to the present. Each of these phases reveals a puzzling association with the news, as the lagged market reaction is filtered through investor reactions and stories.
Why would investors give shares their highest valuation ever right after the announcement of a possible global tragedy?
The first phase started when the World Health Organization declared the new coronavirus “a public health emergency of international concern” on January 30. For the next 20 days, the S&P 500 rose by 3.1%, hitting an all-time record high on February 19. Why would investors give shares their highest valuation ever right after the announcement of a possible global tragedy? Interest rates did not fall over this period. Why didn’t the stock market “predict” the coming recession by declining before the downturn started? One conjecture is that a pandemic wasn’t a familiar event, and most investors in early February just weren’t convinced that other investors and consumers paid any attention to such things, until they saw a bigger reaction to the news and in market prices. Their lack of past experience since the 1918 to 1920 influenza pandemic meant that there was
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July 2020
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