Why does the pandemic affect the stock market?

The collapse of the stock markets and the rising price of the dollar triggered by the coronavirus are signs of an incoming recession 

Person with smartphone showing stock data.

The pandemic has affected the stock market. / Photo: Unsplash

LatinAmerican Post | Juliana Suárez

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Leer en español: ¿Por qué la pandemia afecta la bolsa de valores?

The world's stock exchanges suffered their worst decline in recent times since the coronavirus began to spread around the world. It began in the last days of February when Wall Street was down, as well as the main stock markets in the world.

This week, despite the fact that the virus has decreased its presence in some countries such as China, where it originated, the increase in other countries, especially in the United States, continues to affect the stock market. This despite the fact that last week it managed to record the highest rise after several black days. The "bounce back" reaction came after Congress approved a two-billion-dollar injection revival package.

However, the other exchanges continue to collapse. Such is the case, for example, of the Tokyo stock exchange, another of the most important in the world, which since last week has continued to drop several percentage points.

The reason may be simpler than it seems: the constant uncertainty is immediately reflected in investor confidence, which directly affects the stock markets. This, on a larger scale, has generated a global economic crisis, considering that the two superpowers, the United States and China, have been two of the countries most affected by the outbreak of the virus.

The stock market movement is directly related to optimism or pessimism regarding what is happening in the world. At this time it would be understandable that negativity prevails in what is expected in the future, something that investors demonstrate and is reflected in the stock market. "Investors prefer to withdraw that money for fear that the markets will continue to collapse due to the different consequences of the Coronavirus," said Pablo Alonso, an economist at Boston University in an interview for  LatinAmerican Post. Lack of confidence led to a drop of more than 10% in the critical week (in February), which instantly shot up the price of the dollar, which affects the industries and economies of the countries, something that had not happened since 2008.

"The first thing a person thinks in a time of crisis is that they are going to need liquidity," says Alonso, "because business and the cost of living, in general, are likely to start to get complicated, for example in this particular case, in a quarantine. In that order of ideas, the first thing that is affected are the actions, since many people give priority to money at hand. "

Another important point is the performance per se of the companies that are part of the stock market. Currently, with so many countries beginning quarantine periods, companies have begun to report losses throughout their production chain, thus affecting their profits. This poor performance is also one of the reasons why investors decide to bet on safer investments than volatile markets, says Alonso.

However, not all companies have been affected in the stock market, since what they offer is help in times of a health emergency. With the days and months that have passed with the coronavirus increasing, companies have had to demonstrate their resilience and adapt to needs. This has been helping the world's stock markets to maintain strength in at least some sectors.

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Such has been the case of the American company 3M, one of the main producers of masks. This company sells one of the face masks that the United States Food and Drug Administration (FDA) has claimed has the highest levels of protection, which immediately meant a rise in the value of its shares.

The same has begun to happen with companies like Johnson & Johnson and some pharmaceutical companies like American Abbot. The first, for example, started the week leading the stock market thanks to the manufacture of its medical products and a contract for the coronavirus vaccine.

Despite the fact that companies have managed to strengthen their shares during the crisis, the world panorama of the stock market is still uncertain and may continue to decline as long as the health emergency is not controlled.