Panic In Pandemic

Considering The Macro and Micro Market Factors

Amid the many non-economic factors driving COVID-response, a clear message emerges: Don’t Panic

Research conducted by Dr. Tenpao Lee of Niagra University

The stock market has been uniquely volatile this year due to the COVID-19 pandemic. In the past, investors generally needed to consider macro and micro factors to develop their long term strategies. Now, investors must take the pandemic into consideration to adjust their portfolios accordingly. Still, in the long term, the stock market will always move upward.

The potential for economic and technological development are unlimited and perpetual. The history of the stock market, since its inception on May 17, 1792, has proven that a market crash is always an opportunity for investors in the long term. Therefore, investors should not panic because the Dow plunged more than 1,862 points (6.9%) on June 11th. A dollar cost averaging approach to an index mutual fund will be the best strategy for ordinary investors.

The Pandemic

The stock market will be extremely volatile until the pandemic is contained and vaccines are developed to make people feel safe. The ongoing pandemic recession is caused by a non-economic factor – the coronavirus. It has been a severe, short-term shock to the economy, most economic activity was stopped rather than contracted. Now, the economy is gradually re-opening and no one knows how long it will take to be fully recovered. The risk of a second pandemic wave is possible and the structure of the post-pandemic economy will be significantly different. Some companies will disappear permanently and some will flourish to become new pillars of the economy.

The Macro View

The global demand for the USD has increased during the pandemic. The U.S. stock market will maintain its attractive status quo as the capital market of the world. The federal government and the Federal Reserve Bank will implement fiscal (stimulus packages) and monetary policies (near-zero interest rate) to provide liquidities and to support the economy and the stock market.

The development of new technologies has accelerated under the pandemic, such as 5G applications, cloud computing, in-home working and entertaining gadgets, Artificial Intelligence with driverless cars and drone deliveries, etc. New technologies will enhance aggregate supply with higher productivities and generate new aggregate demand with innovative products.

The Micro View

The risk of a second pandemic wave is possible and the structure of the post-pandemic economy will be significantly different. Some companies will disappear permanently and some will flourish to become new pillars of the economy...

There are many sectors/industries in the economy. The potential for each sector changes and rotates dynamically. Risk and return are always positively related.

Under the pandemic, many sectors were deeply hurt, such as the hotel/hospitality/recreation industries, transportation/ airlines, banking, traditional retail companies, professional sports leagues, small businesses, etc. We don’t know how quickly they will come back and which among them will be reshuffled.

The technology sector and e-commerce were generally not hurt and are actually growing. The top 5 “FAANG” companies – Facebook (F), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOG) and Apple (AAPL) – account for almost 20% of the total value of the S&P 500 companies. Hence, the S&P 500 index offered erroneous perceptions to most investors.

More than 80% of the S&P 500 companies did not increase their value while the market was growing, but decreased significantly during the pandemic. As a result, most investors did not match the same returns of the stock market. The question is: will the FAANG companies continue to dominate the stock market?

 

 

 

About Niagra University
Founded by the Vincentian community in 1856, Niagara University is a comprehensive institution, blending the best of a liberal arts and professional education, grounded in our values-based Catholic tradition. Its colleges of Arts and Sciences, Business Administration, Education, and Hospitality and Tourism Management offer programs at the baccalaureate, master’s, and doctoral level. As the first Vincentian university established in the United States, Niagara prepares students for personal and professional success while emphasizing service to the community in honor of St. Vincent de Paul. Niagara’s institutional commitment to service-learning has led to its inclusion on the President’s Honor Roll for Community Service every year since its inception in 2006, and its recognition with the Carnegie Foundation’s Classification for Community Engagement.