A year ago mankind held its breath. The coronavirus had jumped from China to Italy, from Italy to Spain, and from Spain to the rest of Europe. Hospitals were collapsing and authorities began to take measures to confine the population and prevent the spread of the pandemic. That entailed freezing the entire planet’s economy for several weeks. Something that had never been done. The doubts then were multiple: would the measures stop the spread of the virus? How long should they be adopted? How would companies resist several weeks or months of downtime? How long would it take to get vaccinations?
Money hates uncertainty. It is difficult to calculate the profitability of an investment in stocks or bonds if you do not even know if the company will continue to exist within a year. Although the stock market falls began in February, the sessions between March 9 and 13 will go down in history as one of the most convulsive. In five days there was a Black Monday, a Black Thursday and even a Black Friday.
On March 9, the New York Stock Exchange opened the week with a drop of 8%. The collapse was so abrupt that the market had to close for 15 minutes to reorder the buy and sell positions. After a brief respite, on Tuesday, Wednesday the 11th, the stock markets fell again. And on Thursday. And on Friday. This brought an abrupt end to the longest upward cycle in the United States, which had lasted 11 years. In a few sessions, the equity markets had lost between 20% and 30% of their value. That Thursday, the Ibex 35 signed the worst session in its history, dropping 14%. The world’s largest index, the S&P 500, lost a third of its value between February 20 and March 20. The money was fleeing. The wealth evaporated.
The Ibex 35 experienced the worst session in its history a year ago, losing 14% in one day
“They were very hard days because the stock market collapse was added to the fear of the health situation and the need to start looking for the formula to be able to work remotely,” recalls a fund manager. The leaders of the great powers were very aware of the chaos that occurred in 2008 with the Lehman Brothers crisis and its aftershocks, which in Europe lasted until 2012, with the rescue of Spain. It was necessary to act quickly so that fear did not infect the financial system and banks began to collapse, and then countries. Nuclear weapons had to be removed from central banks.
On March 3, there had already been a meeting of the Group of 7 (United States, Canada, Japan, Germany, United Kingdom, France and Italy) to coordinate a massive liquidity injection program. On Sunday, March 15, the Fed dropped rates at zero and launched the largest stimulus program since the Great Recession. The central banks of Australia, Japan, Norway … joined these stimulus policies. On March 18, after an initial hesitation, he was followed the European Central Bank, announce a € 750 billion bazooka to calm the markets.
With half of the world’s population confined or restricted in their mobility, with factories stopped, planes on the ground, and streets empty, strong and swift action by central banks prevented the world economy from slipping back into the abyss.
One of the most obvious symptoms of the paralysis of the planetary economy was seen in oil. Futures contracts on the Texas barrel (the most frequent contract in the United States) were negative on April 20. Market operators were willing to pay, rather than charge, to shake off future deliveries of crude in the face of the drastic drop in demand.
Oil is also a clear example of a return to normalcy. After trading at -37 dollars a barrel, it is now trading at 66 dollars, a price slightly above what it was at the beginning of 2020.
The round trip of public debt
- March. After years without hearing about the risk premium, the fears unleashed by the coronavirus returned to invoke it. In March 2020, with large investors pouring out of the stock market to buy safe assets, the German and American bonds were in high demand. The yield on the 10-year US bond hit an all-time low of 0.318% (the higher the demand for the debt, the lower the interest rate investors are willing to accept). The German bund reached a -1% return. In contrast, Spanish or Italian bonds were asked for higher returns, considering them the riskiest markets.
- Fed y BCE. The ultra-expansive monetary policies agreed upon managed to stabilize bond prices. In the United States, which is ahead of Europe, the long-term rate rebound has even begun, as the market is already thinking about withdrawing these policies.
At the end of April, humanity began to come out of its shelters and verify that the cities and factories were still there. Stores and restaurants reopened, and the first news about the development of vaccines to combat Covid-19 began to arrive.
Governments, in parallel to the action of central banks, deployed the largest fiscal stimulus programs since World War II. There was direct aid to companies so that they did not have to lay off, support for workers who could not go to their job, tax exemptions … and even, in the United States, direct mailings of checks with cash to the population, so that cope with the possible drop in income.
Another of the measures adopted by the authorities around the world was the requirement that financial companies (banks and insurance companies, mainly) to freeze the payment of dividends to their shareholders. The fear that the financial crisis would damage the solvency of the sector made it necessary to dedicate all the profits generated to strengthening capital ratios. Only at the end of the year did the ECB begin to raise its hand to allow some payments in the most solvent entities.
The action of the central banks managed to ward off the danger of a financial crisis
The new normal
Starting in the spring, the Stock Exchanges regained ground. The world had not collapsed. Yes, some sectors, such as tourism or aviation, were very affected. But others, like the technological one, had risen like foam. Unknown video calling companies, like Zoom, had appreciated more than 1,000%. Also the giants like Amazon or Netflix. The population was at home and every time they bought more online and consumed more hours of series and movies.
One of the most obvious consequences of the pandemic has been the overwhelming momentum of digitization. “We made more progress in the first six months of 2020 than in the previous six years, in terms of telecommuting, online sales, electronic payments and leisure at home …”, explains the investment director of Crèdit Andorrà Asset Management, David Macià.
The market has looked favorably again
to companies of the old economy
Throughout 2020, the so-called growth stocks (especially the technological ones) accumulated an average revaluation in the United States Stock Exchange of 7.3%, while those with a more cyclical profile (industrial, financial, airlines … ) lost 6.35%. Still, the bottom line for global equities was relatively positive for the year as a whole. The S&P 500 Index rose 17%; the Japanese Nikkei, 21%, and the MSCI of the World Stock Exchange, 15.7%. The European Stock Market lagged behind due to the high weight of cyclical stocks and the low technological component.
During the summer, the world stock markets had a few months of doubts. Had they run too long? Did it make sense that many stocks were already trading above pre-pandemic levels despite the economic disaster? The doubts were cleared exactly on November 9, when the Pfizer medical director announced that they had a vaccine that was 90% effective. It also helped that a few days before Joe Biden beat Donald Trump in the United States elections.
In the last two months of the year, stocks soared. And, in addition, a rotation began to take place from the technological sectors to the more cyclical ones. Investors saw that the industry was going to be up and running again, that more raw materials were needed than ever, and that the old economy was not as hit as it had been thought.
And now that? One year after the pandemic broke out, there are more and more vaccines to fight it. And central banks remain firmly committed to continue injecting liquidity. The major global managers are very optimistic about the stock market for the next few years. It remains to be seen whether the monetary experiment manages to come to fruition and, especially in Europe, European funds will fully reactivate the economy and reduce unemployment.