The year 2020 was a precarious one for the entire world, and in the stock market, it was not any different. The year started with stocks trending higher, with business and economic fundamentals largely positive. But uncertainty would soon creep in as the coronavirus disease was declared a pandemic by the WHO (World Health Organization).
To contain the virus, governments across the world moved swiftly to institute lockdown and curfew restrictions. Business activity came to a standstill as economies were literally shut down. A pandemic had changed human living and investors expressed uncertainty in the markets as the Dow shed over 37% of its value between mid-February and late March. The loss in the markets was quick and devastating, but the subsequent response to the pandemic was so impressive that by the end of 2020, markets actually closed higher. The COVID-19 crash of 2020 was very dramatic, but the play was short (and maybe sweet).
How the Covid19 Crash Happened
The WHO had, in late December 2019, announced that dozens of people in Wuhan, China were receiving treatment for a mysterious type of pneumonia. By early January 2020, the first death, as a result of the virus, was confirmed, and by the end of that month, the WHO declared the disease a ‘public health emergency of international concern’. It was only the sixth time in its entire history that such a declaration had been made. The WHO named the coronavirus disease ‘COVID-19 in February, and President Trump declared a US national pandemic on March 13th, 2020. But by that date, anxiety was already high in the markets.
On March 9th (a day that would be dubbed the ‘Black Monday’ of 2020), the Dow tumbled 7.79%, shedding over 2,000 points to settle at just above 23,800. It was a record dip, but two more ‘black days’ were still on the way. On March 12th, 2020, the Dow posted another record 9.99% plunge as it lost over 2,350 points to close the day at around 21,200 points. And on March 16th, 2020, the Dow printed the biggest one-day loss of over 2,997 points as it lost nearly 13% of its value to close the day at circa 20,188 points.
The above three dates were only highlights in a year when the Dow experienced several record one-day losses. In previous crashes, such as the ‘Black Monday of 1987’, the Dow experienced record losses in terms of percentage. But in 2020 alone, the Dow recorded 10 of the worst single-day losses in terms of points, in its entire history.
Why Did the Stock Market Crash in 2020?
The COVID-19 crash of 2020 was largely a result of the government’s response to the pandemic. In the US, the response was particularly unsettling for investors. Faced with an upcoming election, President Trump had initially dismissed the severity and potential impact of the disease, insisting that it was just a ‘flu’ that would be ‘gone by the summer.’ But scientific data that was being released, delivered damning facts. Confirmed positive cases were rising, and unfortunately, so were the resulting deaths. The US, inevitably, went into lockdown mode.
Businesses shut down, travel was restricted, and the virus continued its erratic spread. Over 22 million jobs were lost as the COVID-19 pandemic turned into the COVID-19 recession. The markets became all the more volatile as data streamed daily of confirmed positive COVID-19 cases as well as the rising death toll. With no active underlying economic activity going on, COVID-19 headlines became the most important piece of fundamental data in the markets. Panic escalated as investors speculated in the markets on how far and deep COVID-19 had wrecked the economy.
Nonetheless, there was a general belief that COVID-19 was a health pandemic and not a real economic fundamental that should dictate the future business performance of most companies. The disease had altered human living, but there was optimism that the ‘new norm’ was only temporary and that solid businesses will eventually regain their footing. Investors demonstrated behaviour of cautious optimism, with any encouraging COVID-19 news generating massive tailwinds in the markets.
The Market Rebound
A health crisis can only be solved by a health solution. It was clear that vaccination was the only path to economic recovery. A vaccinated population would get back to work and travel without risking the spread of the virus. But before vaccine headlines hit the wires, the market was already starting its rebound as early as April, with the Dow already down over 37% from its February peak of just below 30,000 points.
The early rebound was a result of an impressive government response to the pandemic. The US Federal government embarked on an aggressive stimulus package worth over $2.3 trillion. It was a comprehensive plan that included direct payments to Americans, loans, and grants to airlines and large businesses, enhanced unemployment aid, massive tax cuts, as well as huge cash injections into hospitals and other infrastructural developments. There was also deferment of student loan payments as well as a temporary ban on evictions or foreclosures of people depending on federal aid programs.
There was already an overall optimism among investors before the pandemic and these actions only encouraged them all the more. As well, interest rates were cut to almost zero, and there was every incentive to take on risk in the markets. By November 2020, markets had edged higher and the 30,000-point barrier was successfully breached. The Dow was, surprisingly, up over 43% up year-on-year as software and technology stocks led a positive surge on the stock market. Populations were confined indoors and the relevant companies took full advantage.
Vaccines were always on the horizon, and their news generated huge upswings in the market. Positive vaccine developments, such as the efficacy rates of above 90%, exceeded market expectations and provided a solid promise of an end to the pandemic. The rollout was impressive, and economic activity slowly returned to normal. Another positive development was witnessed in the political scene as Joe Biden won against the incumbent Donald Trump. Biden publicly acknowledged the need to proactively deal with the coronavirus pandemic, and in 2021, his administration also approved another ambitious stimulus package designed to boost infrastructural development. The market rebound continued into 2021, with the Dow printing an all-time high above 35,000 points. It was an impressive market recovery, but the COVID-19 stock market crash delivered important lessons to investors.
The stock market crash in 2020 proved that volatility in the markets is not entirely caused by financial or economic factors. The crash was inspired by health reasons at the start, but political reasons towards the end were also a factor. Panic in the markets can indeed arise from other facets of human living.
Another lesson for investors was the importance of having a long-term horizon when investing. Stock market crashes are inevitable, and when they happen, they should not distract or alter a solid investing strategy. Like every other crash in the past, the market posted an impressive recovery, with investors that stayed the course reaping great rewards later on. The year 2020 was a volatile one, but the markets still gained overall in the end.
Beyond investors, the COVID-19 crash illustrated how prompt government intervention in times of crisis can help avert a potentially prolonged recession. Vaccine development was an important milestone, but early government intervention ensured that the market started its recovery early on. From cutting interest rates and providing unemployment aid to loans and grants offered to both SMEs and large corporations, the government played an important role that not only salvaged the markets, but also the entire economy.
The COVID-19 crash of 2020 was a short-lived and dramatic collapse of the markets. 2020 was a year of anxiety and uncertainty as governments imposed heavy lockdown and curfew restrictions that suddenly shut down economic activity. Human living changed overnight and the markets reacted negatively to the government measures put in place. But as major sectors, such as hospitality, entertainment, and tourism suffered, there emerged ‘stay-at-home’ sectors that thrived in the ‘new norm’ such as online shopping and delivery, online streaming, as well as video conferencing services. These stocks triggered the stock market rebound, but heavy government intervention also helped prop up other stocks.
2020 was a year of great volatility in the markets, but the rebound was also spectacular. A health pandemic inspired panic in the markets, but it did not dampen investor belief. As soon as major risk sources were dealt with, investor optimism saw the markets reach new record highs. In every sense, 2020 will not only go down as the year of the Great Lockdown but also the year of the Great Recovery.