The Dow lost a staggering 37% of its value due to the COVID-19 crisis.
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Did the Stock Market Crash During COVID-19?
Between February 20 and April 7, 2020, stock market indexes around the globe plummeted due to the onset of the COVID-19 pandemic, which was fueled by a highly contagious and deadly respiratory virus. With the virus quickly spreading and a cure as-yet unknown, the markets became highly volatile, resulting in panicked trading and steep declines of 10% or more: the very definition of a stock market crash.
Over the course of three days in March 2020, the selloffs were so severe, circuit breakers were activated on the New York Stock Exchange that temporarily halted trading. These systems were instituted by the Securities and Exchange Commission in the aftermath of the stock market crash of 1987 to avoid a total meltdown.
On Monday March 9, 2020, known as “Black Monday I,” the Dow Jones Industrial Average sharply declined 2,014 points, or 7.79%On Thursday, March 12, 2020, known as “Black Thursday,” the Dow fell 2,352 points, plummeting 9.9%, and setting a new recordAnd on Monday, March 16, known as “Black Monday II,” the Dow declined even further, losing 3,000 points and wiping out another 12.9% of its value.
In total, the Dow Jones Industrial Average bottomed out with a loss of 37% of its value in 2020 while the S&P 500 lost 34%. Global indexes, such as the FTSE 100 in the UK, the DAX in Germany, and the Nikkei in Tokyo, all posted double-digit percentage declines.
Did COVID-19 Cause the Stock Market to Crash?
There was a definite correlation between the virus’ spread and disruption in labor markets—causing GDP to contract by as much as 25%—which sent stock markets tumbling.
The first known cases of SARS-CoV-2, the virus that caused the COVID-19 pandemic, were reported in December, 2019. While its exact origin is unclear, evidence suggests that SARS-CoV viruses first appeared in bats and somehow jumped to another animal host or directly to a human. What is known, however, is that the virus spread rapidly, and no one was safe: It quickly infected people on every corner of the globe.
In an attempt to contain the disease, government officials instituted social distancing measures and mandatory lockdowns of businesses, schools, and nearly every aspect of everyday life. Factories closed and unemployment skyrocketed—20 million jobs were lost in the United States alone. As economic activities ceased, the stock market reacted negatively: With each new report of the pandemic’s widening reach, traders sold off. In fact, in March and April of 2020, the U.S. stock market’s greatest losses coincided with the country’s steepest daily percentage increases of COVID-19 infections.
What Other Factors Contributed to the COVID-19 Stock Market Crash of 2020?
The onset of the COVID-19 pandemic certainly sent the stock market into a tailspin, but other factors may have played significant parts as well.
Protectionist Policies Dampened Growth
The 2010s were a time of expansion—and contradiction. Arising from the ashes of the Great Recession and fueled by easy credit and low interest rates, the economy grew once again. Social media made the world feel smaller, fueling student-led revolutions like the Arab Spring.
China emerged as a global superpower, while Marvel superheroes dominated movie theaters. Technology became ubiquitous: Everyone had a smart phone with a camera to record history.
While landmark rulings expanded LGBT rights and women spoke out against injustice through the #Metoo movement, at the same time, extremist politicians sought a reactionary approach. Neo-nationalism entered the political discourse, giving power to Donald Trump in the United States, Giorgia Meloni in Italy, and Viktor Orban in Hungary, to name a few, who all sought to turn back the clock on free trade and globalization.
Trump, in particular, imposed steep tariffs between formerly friendly trading U.S. partners, like China. The International Monetary Fund blamed these tariffs for a decline in the global industrial sector between 2017 and 2020.
The Stage Was Set for a Bear Market Correction
Amidst this backdrop, the stock market had enjoyed the longest bull market run in history, from 2009 until February 2020, but critics believe warning signs had been brewing since 2019, when, between May and October, the yield curve on U.S. Treasuries inverted, which was long believed to be a harbinger of recession.
When the World Health Organization declared COVID-19 to be a public health emergency of international concern on January 30 of 2020, the yield curve inverted again, and it would remain inverted until the Federal Reserve cut interest rates on March 5, 2020.
How Was the Stock Market Crash of 2020 Resolved?
Unlike the Stock Market Crash of 1929, which sparked the decade-long Great Depression, the stock markets recovered quickly in 2020, thanks to swift thinking by the Federal Reserve. As early as February 2020, Fed Chair Jerome Powell reassured investors with the following statement:
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” –Fed Statement (February 28, 2020)
In March and April, 2020, the Federal Open Market Committee slashed interest rates to zero, and Congress unveiled a $2.2 trillion fiscal stimulus package. The Fed would also embark on a new round of $1.5 trillion quantitative easing measures designed to add liquidity back into the markets.
By November, the stock market was back at its January levels with the Dow surpassing 30,000 for the first time in history on November 24. The S&P ended the year up 15.6%, while the Dow grew an astounding 43%.
However, uncertainty would linger in the market due to the contentious (and still-undecided) 2020 Presidential election, as well as growing concerns over inflation.
Will There Be a Stock Market Crash in 2023?
While TheStreet’s Martin Barccardax shares a grim forecast from the IMF, he says investors should not lose hope: Global economies will still see some growth in 2023.