Systems on fire… indicators in red… vitals down… trending downward drastically… hold your breath for a harsh landing!!!!
If the stock market has a pilot announcement, this is how it might sound, today.
The Coronavirus pandemic has not only exposed the lacuna in the global healthcare systems and its preparedness, but also opened the Pandora’s box in the global stock markets. Stock exchanges, globally, are going red every day and the trend for recovery seems very bleak for the next few weeks/months.
Stock markets often take pride in operating in an environment of market equilibrium. The constant ups and downs in the price of indexes to adjust to the internal and external factors of the business environment keeps the ecosystem ticking. Investor confidence is also proportional to their ability to understand the business environment, operate in an environment of market stability, and the availability of information to address their knowledge gaps.
Are the markets prepared for the long-term Pandemic?
Many stock markets use circuit breakers, stopping the trade after the fall in index reaches a certain limit, to address any of the short-term volatility in the system. This was invoked multiple times in the past few weeks by various governments, including India and the USA. This has not yielded the necessary results to keep the confidence of the investors going. Federal rate cuts don’t seem to cut the market panic too. Despite the best efforts of the central banking institutions, globally, the virus has exposed the systemic gap in the preparedness of the stock market to handle a pandemic like COVID-19.
Borders closed, schools closed, events closed…. Should stock markets close too?
Markets thrive on the idea of expanding consumption and supply, but with the closing of institutions and placing restriction on the movement of people & goods, the circle of markets is contracting day by day. The prices of stocks are marching towards the floor, taking away huge chunks of liquidity in the market. Investor confidence is also low, as the revival of markets to the normal levels would take a longer time frame. With very little control to overcome this uncertainty the market is clearly in panic mode, globally. The herd mentality of the markets allows for the chain reaction to expand quickly from one market to another.
On the government front, the highest priority would & should be to control the spread of the virus. The stock market crashes on the other hand will bring-in more distractions as it would require constant intervention of the Govt. & central banking systems. There is very little chance for the markets to operate in equilibrium until the flattening of the pandemic curve happens.
USA had shut the markets for a week in 2001, post the 9/11 incident. Though the approach was not rated as successful, it prevented the panic selling from the traders as the worse sell-off was at 13%. Unlike 2001, COVID-19 pandemic is tougher as the duration of impact is longer and more widespread across countries. This unique situation throws us more questions and moral dilemmas.
For (closure): Can the stock markets be closed indefinitely till the flattening of the pandemic curve?
Against: Shouldn’t market be allowed to operate on its own? Can’t it not recover after hitting the floor?
For: By then… Aren’t we losing all the liquidity in the market? Isn’t the market revival a distant dream now?
Against: If you expect to close the stock market during downfall, will you also close the market when it is on a high run? Otherwise, isn’t it immoral?
For: How else can you prevent panic selling? Isn’t it the Govt. duty to focus on economic welfare as well?
Against: Don’t we have circuit breakers to prolong the bad effect?
For: Aren’t circuit breakers for short-term? How will we stop when the pandemic occurs for a longer duration?
Against: Can’t we not work on improving the liquidity in the system?
For: When the investor confidence is very low, how will it shift the curve?
Against: Don’t you think closing the stock market will have a ripple effect globally?
For: Won’t it not, if it still remains open?
While it is evident that there is no clear winner on either side, the situation demands an affirmative and quick action from the governments. The decision making should tip towards exercising the option that has the potential to yield better levels of control on the outcomes, even while the situation is highly uncertain.