Markets In The Corona Virus Crisis - Continued (Ninth Part)

This week we continue with our analysis of the markets during the Covid-19 crisis by re-examining our assumption that Wall Street and Main Street intersect. Or, do they each run parallel to each other in their own universe?

Mahmut Karayel

MARKETS IN THE CORONA VIRUS CRISIS (Continued on 2020-07-14)

We completed the 20th week in our tracking of the US equity markets in relation to the health/economic crisis that we are going through. We intended to compare the market behavior during the current crisis to market behavior during the 2008 financial crisis that lead to the great recession.

As we can see in the following figure, the US Market’s response to the COVID-19 crisis has been quite different from the reaction to real estate credit crunch of 2008. Average annual volatility, which started with wild swings is also lower than the volatility during the Financial Crisis period.

The annualized Sharpe ratio during the 2008-2009 Financial Crisis was -1.2. So far, during the COVID-19 crisis, it is only -0.2.

Clearly, something is different. I was expecting things to go similar, but this time, as many already wrote, the stock market is not following the main street. ("This time, it is different.")

In the Financial Crisis, people from all walks of life lost their overly leveraged homes and possibly other debt-ridden assets. White collar workers and blue-collar workers alike lost their jobs. A big chunk of consumption disappeared due to loss of jobs and income. In the COVID-19 crises, the main burden has fallen onto the lower income section of the society, who neither participate in the stock market nor have a lot of discretionary income for consumption. Their lack of participation in the economy is a human tragedy, but it is not noticed in the bottom line as far as the stock market is concerned.

The market also does not seem to care much that both the haves and have nots are consuming less. This points to another divide: Consumption related to usual human needs and travel and enertainment is down, but I suspect tech consumption is up. Just like "the market" has become a tech heavy markey, the weight of technology has also increased in consumption, at least for the haves.

I trust that, at some point, the US Market participants will acknowledge sections of the society that are being left behind due to the COVID-19 crisis. This recognition can happen naturally, or through protests of the less privileged. Certainly, the narrative of the upcoming presidential election focus on this divide.

What will happen at that point depends on the actions of both the haves and the have-nots. As the rise in the number of infections push the end of the crises farther out into the future, the final reckoning may come with more serious consequences.

As we adapt to the shelter at home lifestyle, the advantage of the users of technology has become more evident. This crisis accelerated the eventual dissemination of a lot of jobs due to advances in technology. I can only hope that it will also accelerate our search of a solution as a single society. The education divide, the tech divide, and the income divide are all related.

Please share your thoughts in the comments section.

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