COVID-19 and stock market crash

The sentiment in the stock markets across the world is gloomy. This is reflected in the frequent crashes in the share markets in all parts of the world. Financial markets in India are witnessing sharp volatility currently as a result of the fallout in global markets. The fall is in line with the global benchmark indices as the domestic market usually tracks the major global indices and the high volatility is likely to continue in the near future. Further, with overseas investors (FPIs) flying to the safety of dollar-backed assets from emerging markets has led to a sharp downfall in the Indian Stock Market. S&P BSE Sensex which was 42273 points on 20 January, 2020 is 29894 points on 08 April, 2020. The price to Earnings Ratio of Sensex is less than 18 (P/e is 17.81 on 31March, 2020) which is far less than the historical range between 20-24. Markets across large, mid, and small caps have corrected sharply from their peaks. In the FY20 the mid-cap index fell by 26 per cent while the Sensex fell by 22 per cent.

COVID-19 is a black swan event

Throughout history, there have been highly improbable events that catch almost everyone by surprise and can potentially have a large impact on the status quo by disrupting human activities and creating havoc. Such kind of events are called black swans. The name stems from the fact that until 1697, mankind believed that all swans were white. Then Dutch explorers sighted black swans for the first time in Western Australia, completely nullifying the belief that swans can only be white. Thus, the term ‘black swan’ morphed into describing an event that occurred despite seeming impossible. Black swan is the occurrence of a highly unexpected event that also has an extreme impact. The field of finance regularly attempts to capture outlier events and fails with equal regularity. Impact of novel coronavirus (COVID-19) on the stock market is one such event, which has all characteristics of black swan.

The Stock Market has a history of crash and recovery

The worldwide Stock market has a history of crash and recovery and the Indian Stock Market is no different from that. Sensex plunged 53 per cent in one year in “Harshad Mehta Scam” (1992) but recovered 127 per cent in 1.5 years. During the “Asian Crisis” (1996) Sensex dipped 40 per cent in four years but recovered 115 per cent in one year. During “Tech Bubble” (2000) Sensex crashed 56 per cent in 1.5 years but recovered 138 per cent in 2.5 years. When the US faced the “Real Estate – Lehman” crisis (2008) Sensex crashed 61 per cent in a year but recovered 157 per cent in 1.5 years. The current market has crashed around 30 per cent in less than three months. Due to COVID-19, no one knows when the economy will be back on track. Some Experts even compare this meltdown of economies with the “Great Depression” of the 20th Century. The “Great Depression” started in 1929 and lasted until the late 1930s. Between 1929 and 1932, worldwide Gross Domestic Product (GDP) fell by an estimated 15 per cent. By comparison, worldwide GDP fell by less than 1 per cent from 2008 to 2009 during the Great Recession.

Recovery in the current stock market

It would be foolish to expect a quick economic rebound from the current COVID-19 effect. Though the financial crisis is inevitable, considering all-out efforts by central banks and fiscal authorities, to soften the blow, deep economic slump might be avoided. The problem in the current scenario is that until we know how quickly and thoroughly the public-health challenge will be met, economists cannot predict the endgame of this crisis. Trade-in 2020 is expected to fall steeply in every region of the world and basically across all sectors. But global trade could rebound rapidly after that. However, it would depend on how quickly the pandemic is brought under control, and the policy choices which the governments took to support their economies. Once this pandemic is over with normalcy returning to business and economy, the stock market will start moving in a positive direction, and as witnessed in the past, recovery would be faster than expected. It is true about the market that whether it is the correction or growth, both phases make equity or stock market interesting and worth taking exposures. But it is highly advisable that do not jump into the market or do not try to catch the falling knife.

The author is CA, GST and Economics Specialist