Understanding of financial markets wants to understand and to explore together what the impact of this coronavirus crisis is on evaluations and the market at large, specifically we want to understand, how does the crisis inform the values that we see in stock markets? what is that we can learn about the crisis from financial markets and also and why not? how can we actually protect our financial world as well as construct resilient portfolios that can withstand this very dramatic and tragic crisis that we’re experiencing?
Now, before we start by analyzing the particulars of financial markets, let’s just remind ourselves, so the three things that are interacting in which ways, the public health crisis, the state of the economy at large and of course, financial markets. Now, whenever the economist and in particular financial economies talk about the economy and financial markets they can sound cold-hearted and a little bit detached from this tragedy.
Of course, the objective is always to solve these, you know, tragic public health crisis and to address the anxieties and fears we are all experiencing on account of these. So on the public health crisis, of course, we have many questions, how bad will this get?
Will our health system have enough capacity if the severity of the crisis gets worse. The second is, of course, the state of the economy. How deep the contraction will be, what will be the shape of the recovery? Will it is a U-shaped recovery, will it be an L-shaped recovery, will it be a V-shaped recovery? And second, what would be the policy reaction? How do we have to think about what the government is going to do in order to address the many challenges that we’re experiencing when it comes to this crisis.
Now, financial markets have a very difficult role to play, because they have to put all this together, they have to understand the evolution of the health crisis, they have to understand the evolution of the economy itself, the policy reaction and more than that they have to some extent forecast how these things are gonna be playing out in the months, years that follow.
So, we want to actually treat all these things, do it as systematically to the reaction of financial markets broadly understood to the coronavirus crisis. We all know and we all have seen these very sad plots, it tells you essentially the number of deaths and cumulative deaths in red in the many countries that have been exposed to this type of virus, there you have Italy, the epicenter over the last few weeks of the coronavirus crisis, China, the first country to experience it.
In Spain, sadly becoming the second epicenter of the coronavirus crisis and finally the U.S. in the earliest stages and following sadly a similar path to the one that Italy and Spain had followed in years before. This is the state variable so to speak that captures the state of the public health crisis that we’re suffering.
Now, of course, the market reacted to all this. You can see are the daily deaths fatalities in the United States, the market reacted before the crisis, the public health crisis got going in earnest and the reason, of course, has to do with the fact that the market was following closely what was happening in other parts of the world. As you know the market was following, to some extent closely even though it reacted late as we will see shortly. As always when there’s a crisis there are slow in coming but when they come they happen fast.
The crisis does not affect all sectors equally and the market being irrational in many situations, well, it’s not completely crazy, some sectors like food and supplies retailing reacted very positively on account of the fact that you know, a lot of the demand was accelerated when people panicked and started going to grocery stores in order to build the buffers in anticipation of the long sheltering place that the public health measures would require.
Other things like automobiles and components fell on account of the fact that very clear that demand was going to be delayed. Finally, energy is peculiar, because contemporaneously to this terrible coronavirus crisis, there seems to be a price war between the Saudi Arabia and Russia for the control of the oil market and pricing in that particular market. So the first thing to understand is that the market reacted as it should, how the market was processing information but not all sectors reacted equally, some sectors, in fact, experienced positive returns on account of the acceleration of demand the crisis was bringing about for those sectors.
How can we learn than about the evolution of the crisis?
This is the moment to be imaginative, there’s a lot of things that we can do in order to track a little bit the behavior of the economy, in fact, such as the richness of data at our disposal these days, but you can actually even follow the evolution of the crisis on a daily basis. Here’s an example of how you can do that. You have a plot here of the travel numbers for the month of March, both for 2019 and 2020. In yellow, you have the numbers for the year 2019, in red, you have the numbers for the year 2020. On average, throughout the month of March of 2019 between two and 2.5 million Americans took to traveling on an average day. As you can see, the number of people traveling during the month of March has collapsed, we have daily data from the TSA, the Transportation Security Administration.
As always the market is forward-looking, it may get things wrong, it may discount some of those values more than they deserve but roughly the market seems to be reacting largely in a reasonable way to the tragic events that we’re experiencing over the last month, all through. Now, you can learn as well from history. So sadly, this is not, of course, the first pandemic we have experienced, I’m sure many of you have heard of the Spanish flu of 1917 to 1919 roughly. That was a terrible pandemic as well, it coincided with the last year or two of the First World war, is called the Spanish flu, not because it originated in Spain but rather because the Spanish press was quick to report that something was afoot, something terrible was taking place that indeed the flu, an influenza pandemic was taking place, whereas the countries, the belligerent nations in the First World War, Spain was not a participant in the First World War, imposed some type of press suppression, you know, they’re not to demoralize the troops.