10 December 2021
How the coronavirus infected the financial markets
The coronavirus pandemic has had an unprecedented impact on the global economy and impacted the financial markets more than any other event in living memory. And it has created major challenges for policymakers around the world.
In this article, we’ll dive into the economic fallout of the pandemic and focus on the fundamental forces that drove heightened volatility across the financial markets.
Interest rate cuts
As coronavirus cases continued to soar, the financial markets tumbled. In response, central banks the world over slashed interest rates to record lows and US President Biden announced a $1.9 trillion stimulus package. Ideally, interest rate cuts should encourage more borrowing, which should boost the economy, and impact the financial markets positively. However, the impact of these cuts has been minimal.
Investor sentiment is one of the most important factors determining the performance of the financial markets. One study revealed that the sentiment was generally negative when it came to the expected impact of the pandemic. The result has been the poor performance of the financial markets. This negative sentiment has prevailed since the pandemic began. A good example is the revelation of a new Omicron variant. Shortly after it was announced, the financial markets took a tumble and the S&P 500 closed 2.3% lower, while the Nasdaq index fell 2.2%. European stock markets also fell 3%-5%.
Supply and demand constraints
COVID19 has led to supply bottlenecks globally. In the US, these constraints have had negative impacts on all areas of the economy. The most significant being energy supply constraints. As a result, the USD has experienced some of the worst inflation in the past two decades, rising beyond all expectations. In October 2021, the US inflation rate soared to 6.2%
Black swan theory
The Black Swan theory states that sudden and unplanned events can have serious impacts on the financial markets, which certainly applies to the Covid-19 pandemic as well. The economic fallout has caused a huge impact on health systems globally and forced entire sectors of the economy, such as travel and tourism to shut down.
As a Black Swan event, the pandemic has caused wild swings in the markets as investors rushed to diversify their portfolios and flee to safe-haven assets. The associated effects of the pandemic have led to wild swings across all financial asset classes, which has led to an overall downturn.
In general, investors tend to place a higher value on assets that limit their downside risk rather than pursuing higher returns that come with the added risk exposure. Thus, they are more likely to choose safe alternatives with minimal risks despite the alternative that offers higher potential gains. For investors in the financial markets, this can help to explain the market’s movements and trend direction over the coronavirus pandemic.