The Financial Markets and the Coronavirus

Introduction

The Coronavirus is a pandemic that has swept the globe, causing widespread panic and financial instability. The virus originated in China and quickly spread to other countries, resulting in a significant death toll. Hospitals have been overwhelmed with patients and governments have implemented strict measures to contain the virus. The pandemic has also caused severe damage to the global economy, with stock markets plunging and businesses shutting down. Markets recovered and soared to new highs, however, as central banks around the world intervened with trillions in new liquidity. Now, interest rates are rising to combat soaring inflation, and the situation is still very much evolving. It remains to be seen how the world and financial markets will recover from this crisis.

Impact on the Economy & Stock Market

The Coronavirus pandemic has had a profound impact on the economy and stock market. The S&P 500 index, which is a gauge for the overall stock market, fell by over 30% when the pandemic began. Unemployment in the United States rose to over 10%, and GDP contracted by 3% in 2020. These impacts were felt across the globe, with economies in Europe and Asia also experiencing significant slowdown. 2020 was a rollercoaster year for the stock market, with the S&P 500 reaching an all-time high in February 18, 2020 before beginning its plunge the following week and through the first three weeks of March as the COVID-19 pandemic took hold (Yahoo! Finance, 2022). The market then regained some ground in April and May before consolidating in June and then again at a higher level from September to November. The market then broke out November 5, 2020, and rallied strongly through the end of the year, helped by news of promising vaccine trials and prospects for more fiscal stimulus from the incoming Biden administration. In total, the S&P 500 finished 2020 at its (then) all-time high, up nearly 60% from its pandemic lows reached on March 23, 2020. The recovery was v-shaped and quite rapid. As of today (September 26, 2022), the S&P 500 is at 3665, below where it ended in 2020 but still above its Feb 18, 2020 peak of 3385, having significantly sold off in 2022 due to a combination of the Fed Funds Rate rising and quantitative tightening beginning.

Unemployment spiked dramatically in 2020, from 3.5% in January to 14.7% in April 2020 (BLS, 2022). It peaked that same month and fell over the rest of the year to 6.7% by November-December 2020 (BLS, 2022). The low was 3.5% in Jan-Feb 2020, and the high was14.7% in Apr 2020 (BLS, 2022). Current unemployment according to the most recent survey from the BLS (2022) on Sept 26, 2022, is 3.7%--so roughly back to where it was before the lockdowns of 2020. The pandemic impact on employment varied according to industry, as payrolls for couriers and messengers rose 21.5% from Feb-Nov 2020 while payrolls fell 17.2% during the same time for bars and restaurants (Dougherty & Morath, 2020).

The US economy shrank 4.8% in the first quarter of 2020 (Torry, 2020a). This was the biggest drop since the first quarter of 2009, during the Great Recession. The wreck continued into the second quarter with GDP falling 9.5% year-over-year, its fastest rate of decline in 70 years (Torry, 2020b). Since Q2 2020, GDP has skyrocketed, from 19.477 in Q2 2020 to 24,882 in Q2 2022 (St. Louis Federal Reserve, 2022).

Days with Big Swings

During the week of March 8-13, 2020, the S&P 500 opened at 2863, closed at 2746; the next day it rebounded sharply to close at 2882. It then fell precipitously the next two days to close out the 12th at 2480. On the 13th, it gapped up on the open and closed at 2711. All of this was thanks to traders seeking safety in bonds while waiting for word from the Federal Reserve on what type of intervention the central bank would implement to save the crashing economy (Hoffman, 2020).

The events of March 16, 2020, were fueled by corporate treasurers and pension managers fearing the worst and needing to pull money from money market funds, forcing funds to sell bonds. It is a self-reinforcing feedback loop of liquidation. The Federal Reserves intervention of pushing rates to near zero and buying $700 billion in government and mortgage bonds was not seen as enough, and traders and fund managers panicked by selling (Baer, 2020).

On March 17, 2020, the Dow Jones Industrial Average rose by 10%, its biggest one-day percentage gain since 1933. The rally was driven by a surge in government bond prices and a decline in the value of the U.S. dollar but also by the fact that the Federal Reserve announced that it would pump $1.5 trillion into the financial system while the Trump Administration pledged stimulus support checks for Americans. These measures helped to calm fears about a possible recession (Langley et al., 2020).

On March 24th, the Dow rose 11%. Traders were optimistic that the bottom was in on the sell-off and that the government stimulus deal would signal a major reversal. It appeared the capitulation had occurred and now everyone was rushing to buy the market (Osipovich et al., 2020).

The Governments...

Fed Balance Sheet, Interest Rates, and Policy Changes

Total assets of the Fed have more than doubled since the pandemic hit. From March 2020 to today, the increase in dollar amount is 4.6 billion.

In March 2022, the Fed raised interest rates for the first time since 2018, but being well behind the curve the move comes as too little and too late to curb inflation. The Fed changed its Fed Funds Rate target because it was time for the banks to begin squeezing market participants. Inflation was raging, consumers were tapped out, credit was tapped outthus, the squeeze begins.

The Fed raised rates and planned to reduce its balance sheet through quantitative tightening (QT). When the Fed wants to stimulate the economy, it buys assets, which increases the money supply and lowers interest rates. Conversely, when the Fed wants to slow down the economy, it sells assets, which reduces the money supply and raises interest rates. The Fed wants to slow the economy to curb inflation, which will let the banks squeeze creditors, force liquidations, rinse, and repeat.

In June 2022, the large rate increase was due to CPI coming in hotter than expected. The central bank could no longer pretend to be ignorant on the inflation front.

In July 2022, the Fed again raised rates, again due to CPI coming in hot. Again, the Fed showed that it has no control over inflation.

The WSJ article suggests that a large balance sheet reduction is equivalent to small rate increases. In reality, the Fed cannot reduce its balance sheet. If it tried, markets would break, plain and simple. This is why the WEF wants a Great Reset.

What Caused Inflation?

What caused inflation, initially, was the trillions of new dollars quickly printed off by the worlds central banks, led by the Federal Reserve. What caused inflation to persist was the policy of governments in the West with regard to energy. A combination of bad governmental regulatory policy (and sanctions banning Russian commodities) and poor fiscal policy has led to rampant inflation.

Thoughts on the Role of the Federal Reserve

The Fed propped up markets for a moment in 2020, as it was expected to do. In doing so, it destroyed the value of the USD. However, compared to other currencies (in a much worse condition), the USD has looked strong in 2022. This will change as QE ramps up once more. Hyperinflation will set in.

Conclusion

The pandemic was the instigator of what will eventually become the great reset, longed for by the WEF. It will be a process that will end in hyperinflation thanks to the Feds…