Why Are Stocks Doing Well During the Coronavirus Pandemic?

As COVID-19 spread rapidly during March, stock prices plunged. Then, things turned around, markets rebounded, a move that seemed irrational to observers. When the number of coronavirus cases was rising, what was it that what driving a reversal in stock prices?

It appeared as if investors were not overly interested in the number of cases. Investors were more interested in the latest research on the trajectory of the virus, suggesting that the future of the virus was worse or better than expected. If the data suggested the former, stock prices decreased. If it was, the latter, stock prices tended to rise.

Peter Schott, an international economics professor at Yale University, suggests that traditionally when there is bad news, markets tend to decline. Conversely, when there is good news, markets tend to rise.

Individual Stocks and Unemployment Claims

Stock prices and unemployment claims across the country were the subjects of a study. The results were surprising. In states where there are more workers in industries with high market declines, there were fewer job losses per capita.

According to Schott, the research is still a “work in progress.” His hope is that the results of the study and consequent analyses can help those with policymaking responsibilities determine which areas of the country will take the brunt of an economic decline, and determine the aid needed.

How Has the Market Gauged the Severity of the Crisis?

Researchers reasoned that investors might have considered simple models to project the number of coronavirus cases. The thinking was that investors might have relied on a model that made the assumption cases would grow exponentially. Or, perhaps the investment community used an S-shaped curse model in which exponential growth levels off eventually. With new data being released daily, investors could very well have plugged the current data into software running one or the other of these models, hoping to predict the trajectory.

To test their concept, data gathered from the SARS outbreak in Hong Kong early in the century was examined. Daily infection data was used to determine what a logistic model might predict for future case counts. Based on the expectations, the model was revised daily.

During the SARS pandemic, the Hong Kong Hang Seng Index dropped between eight and eleven percent when the model predicted a doubling of infections. Once it appeared that one could see the light at the end of the tunnel, the market recovered. It stops its free-fall.

Using extrapolated data, the research team turned to analyze the COVID-10 outbreak. The study period was from January 22 up to and including April 10. The researchers found a similar pattern. When a doubling of predicted cases was announced, opening and closing prices declined about nine and five percent, respectively. However, when the numbers of projected virus cases dropped by say, 20 percent, which happened on March 24, the market rose by 9 percent.

The team then focused on individual companies stock prices. The thinking was that the “wisdom of the whole” could be used to assess the company’s vulnerability to the current crisis. Specifically, what might happen to the target company’s profits? Although many companies would see a drop in revenue, factors such as location, industry, and if employees could perform their function at home were affected differently.

The researchers found that capital-intensive companies were more likely to see a decline in their market value. On the other hand, companies such as restaurant chains could increase their chances of survival by reducing the number of employees.

From the stock markets perspective, a restaurant chain will weather the current crisis better because it can cut costs.