The stock market is usually controlled by a number of factors. Outside influences can have a big effect on the market such as a coup, huge debt, global warming, and such factors. Pandemics aren’t left behind when it comes to the stock market.
Currently, we are in the middle of a global pandemic in the form of a type of coronavirus, known to us today as Covid-19. Now, with the virus claiming over 6,000 lives to date and over half a million infected cases, this is a once-in-a-generation disaster. The virus isn’t only claiming lives alone, the markets have suffered in its wake too.
But why does the market suffer whenever there’s a pandemic? Doesn’t money just stay in the bank or circulate in the market just as before? What really happens to the stock market during a pandemic like the one we are currently facing?
One obvious reason why the stock market tends to suffer when there’s this sort of scenario is that people usually panic. And, the market doesn’t like it when traders and customers are in panic mode. People tend to want to secure their money, quite literary.
This brings people to the next stage of selling their shares in order to have as much liquidity as possible, just in case. This makes a number of stocks available and hence a reduction in their market value since everyone is selling. Buyers, on the other hand, are never in plenty during such times, which further drives the value of the stocks down.
So, what about those who have more money than they need in their bank accounts? What do they do with their stocks during such critical times? Well, most of them tend to sell their stocks and go for bonds.
This, however, cuts both ways as even those who ‘assume’ they are shrewd in the market also go for bonds. Right now, as it was expected, bonds are settled as they always are and look like a value for any investor. Stocks, on the other hand, don’t look that safe for any investor.
But, as much as investors are losing faith in stocks, they still remain valuable after the crisis. In the next 5 or 10 years after, what would have changed with the company you had invested in? Probably nothing, in terms of the market value of the stock. So, why the rush to sell just because there’s a pandemic?
Another thing that also causes the stock prices to plunge during a pandemic is debt accrued before the crisis. Currently, large corporations have debts levels higher than anything we’ve seen in recent history. The pandemic is just making the obvious clear – though in a brutal way.
With clients pulling out and no assurance in the market, and stock prices also falling, those huge debts are coming back to bite everyone involved. The market was stable with the debts since it was all a rotating wheel, pinches weren’t felt as much. Now, there’s less to go around for each trading partner (banks and investment firms).
Those debts were used to lend to consumers in the form of credit, but now, everyone is closing ranks. People have their cash at hand and have pulled out of investing opportunities. If interest is paid by the month to keep the financial wheels moving, what happens?
The market tends to thrive when banks have enough to lend. This is also one of the best ways banks make money today. When there’s a pandemic, likely banks won’t risk lending. They, in most cases, see their stock fall, so there’s nothing much to leverage their partners with. Then, there’s a case of not being sure you’ll pay. Pandemics make people panic and some borrow, not for investment, but for personal use. With there being no money to invest, who buys the dumped stocks? No one and the prices just go down further.
The stock market is one of the most sensitive aspects of the financial sector. And, though the indications of why the market falls or rises can be anything, these are just part of the reasons why. They all form part of the big cycle that affects the market both positively and negatively. During a pandemic, like the one we are currently under, the market is usually distressed and suffers until the crisis is done.