On 08 June 2020, the World Health Organization (WHO) announced that the COVID-19 pandemic was worsening around the globe and warned against complacency: “most people globally are still susceptible to infection. (…) More than six months into this pandemic, this is not the time for any country to take its foot off the pedal”. On the very same day, the US stock market began its fourth consecutive week of rally. The S&P 500 index is back to where it was at the beginning of 2020, erasing the historic plunge (one-third of its value) that took place between 20 February and 23 March 2020, as if nothing had ever happened. This is simply unprecedented, as illustrated in the figure below.

Figure 1 The US stock market in the time of COVID-19

Note: This figure compares the drop of the S&P 500 index during the dot-com crisis (which peaked on March 24, 2000), the subprime crisis (peaked on Oct. 9, 2007) and the COVID-19 crisis (peaked on Feb. 19, 2020). In March 2020, it took only one month for the S&P 500 to lose one-third of its value, while it took one year for the subprime crisis to decline the same amount, and one year and half for the dotcom bust. Authors’ computation.

Is anything strange about the stock market behaviour in the time of COVID-19? As the world suffered from the worst economic crisis since the Great Depression (Baldwin and Weder di Mauro 2020a, 2020b, Bénassy-Quéré and Weder di Mauro 2020, Coibon et al. 2020), the reaction of stock markets raises serious concerns. Since the beginning of the crisis, stock prices seem to be running wild. They first ignored the pandemic, then panicked when Europe became its epicentre. Now, they are behaving as if the millions of people infected, the 400,000 deaths, and the containment of half the world’s population will have no economic impact after all.

In one of his influential New York Times columns, Paul Krugman (2020) said out loud what many people were thinking: “Whenever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy (…). The relationship between stock performance – largely driven by the oscillation between greed and fear – and real economic growth has always been somewhere between loose and nonexistent”. The no less famous Malkiel and Shiller (2020) have also discussed the seemingly odd behaviour of stock markets in the face of the pandemic. According to Malkiel, the alleged stock market irrationality is only “apparent”, and the COVID-19 crisis does not “impl[y] that markets are inefficient” inasmuch as there are no arbitrage opportunities, and stock markets remain hard to beat. Shiller is more nuanced: “Speculative prices may indeed statistically resemble a random walk, but they are not so tied to genuine information (…). The contagious stories about the coronavirus had their own internal dynamics only loosely related to the information about the actual truth”.

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What new insights on stock markets behaviour can be drawn from the COVID-19 crisis? This debate is of special importance for financial economists, but also because the general public has a very negative view of the stock markets, which should not leave us unconcerned (Rajan 2015) – all the more so since the COVID-19 crisis put science and ‘experts’ to the test (Aksoy et al. 2020), without sparing economists.

There is a fast-growing body of research looking at the responses of stock markets to the COVID-19 pandemic, which is already giving some insights. While the dynamic of stock markets during the pandemic might look random, irrational, or even insane at first glance, on closer inspection they did not react blindly. Several studies have shown that stock markets were effective in discounting the most exposed companies: those who were more financially fragile, subject to the disruption of international value chains, vulnerable in terms of corporate social responsibility, or less resilient to social distancing (Alburque et al. 2020, Ding et al. 2020, Fahlenbrach et al. 2020, Pagano et al. 2020, Ramelli and Wagner 2020). Moreover, it seems that stock market losses are related to analyst forecast revisions, at least in the medium term (Landier and Thesmar 2020). In relation to these papers, we take a macroeconomic perspective. Indeed, the above-mentioned studies provide valuable information, but some questions remain open.

How have stock markets reacted to the COVID-19 pandemic? How do we explain differences in responses between countries? Are these differences in stock market response across countries related to macroeconomic or institutional characteristics, and if so, which ones? Are these differences due to the way governments have handled the pandemic? How have stock markets have reacted to lockdowns and economic policies implemented countrywide to ‘flatten’ the curve of infection and the curve of recession? (Gourinchas 2020)

In our recent paper (Capelle-Blancard and Desroziers 2020), we assess how stock markets have integrated public information about the COVID-19 pandemic and the subsequent lockdowns. Although the COVID-19 shock has been global, not all countries have been impacted in the same way, and they have not reacted in the same way. We take advantage of this strong heterogeneity. We aim to explain the difference in stock markets response by the situation in each country before the crisis, as well as subsequent containment measures (social distancing and stay-at-home orders) and economic policies (fiscal and monetary) implemented during the crisis. We consider a panel of 74 countries from January to April 2020, which might be divided into four phases: Incubation, Outbreak, Fear, and Rebound. For each country, we collected daily data about stock index prices, the number of COVID-19 cumulative cases and deaths, global market sentiment and volatility, government measures taken in response to the outbreak, and various indicators of mobility (or lack thereof).

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Three main findings about stock market reactions during the COVID-19 pandemic arise. First, after initially ignoring the pandemic (until 21 February 2020), stock markets reacted strongly to the increase in the number of infected people in each country (23 February to 20 March 2020), while volatility surged as concerns about the pandemic grew. However. following the intervention of central banks (23 March to 20 April 2020), shareholders no longer seemed troubled by news of the health crisis, and prices rebounded all around the world. Second, country-specific characteristics appear to have had, at best, little influence on stock market responses. Stock markets did not react more strongly in countries more susceptible to the pandemic, either due to structural economic fragility (for instance, indebted countries), or through exposure to transmission vectors (for instance, countries with ‘at-risk’ populations). Third, investors were sensitive to the number of COVID-19 cases in neighbouring (but mostly wealthy) countries. Fourth, credit facilities and government guarantees, lower policy interest rates, and lockdown measures mitigated the decline in stock prices.

In conclusion, do stock markets incorporate all available information? Actually, it transpires that we can see the glass as half-full or half-empty. On the one hand, the dynamic of stock markets during the COVID-19 pandemic is not completely accidental. In particular, our study suggests that it was not the situation of countries before the crisis that influenced the reaction of stock markets, but rather the health policies implemented during the crisis to limit the transmission of the virus and the macroeconomic policies aiming to support companies. On the other hand, fundamentals only explain a (very) small part of the stock market variations. Just like Krugman and Shiller have claimed, it is hard to deny that the link between stock prices and fundamentals have been anything other than loose.

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