Corona Virus in the Stock Market: Despite challenges, why don’t the US just shut down the markets for a while like Nepal?

"Markets are driven by stories and economists must know this at some level. We need to understand the narrative—the narrative today is a coronavirus." by Professor Robert Shiller, the Yale University Sterling Professor of Economics and Nobel Laureate. He stated that the factors such as how long shelter in place orders are in effect when people get back to work, and the development of a vaccine will alter the effects this narrative has on the economy.

We have looked at the new coronavirus cases in the USA and correlate with the S&P 500 index, there is a negative relationship between these two variables.

A negative correlation is a relationship between two variables that move in opposite directions. In other words, when variable A increases, variable B decreases i.e. when the new virus-infected cases increase in the US, the S&P 500 index decreases.

The logarithmically transformed variables and their graphical presentations are as follows:

Similarly, below are the graphical presentations of the raw data to exhibit the inverse relationship between the number of new Corona Virus-infected cases and the US stock market index.

While reviewing the financial market single day crashes since 1985, we have noticed the following facts. The cut off rate 7% is picked due to the Circuit Breaker rules in the US which is a 7% drop leads to 15 minutes trading halt in the market, if it drops an additional 6% trading halt of another 15 minutes, if S&P 500 drops a further 7%, for the total drop of 20% in a single day, then the trading ceases for the day. The circuit breakers were adopted in the wake of the Black Monday crash of Oct. 19, 1987, when the Dow plunged 508 points or 22%.

These automatic market halts are designed to prevent the market from the free fall. The halt time gives investors time to understand the situation and improve their investment decisions by reading the market information and to handle their trading over-reactions.

The current Coronavirus led financial market crisis was started from the second week of March 2020 in the US, have several more than 7% moves in both directions. In recent history, March 2020 has been recorded as the most Volatile month in the US stock market. But the recent data indicates some positive signs of sustain in the stock market indices and the decrease in the new corona virus infected cases in the US particularly and in the world in general.

In Nepal, our various infrastructures are not enough to keep the economy open despite very few numbers of active coronavirus cases. Our government has done one of the best decisions ever to start the lockdown at their best at the right time. We hope and pray for the NO SPREAD and NO DEATH from the unseen enemy in Nepal and NO MORE infection and Death in the world.

As per recent data, the US is the No 1 with Corona Virus-infected cases and the death despite their efforts to curve the health problems. Lately, there have been regular discussions over opening the economy to curve the financial problems with the strong measures to control the further spread of the deadly virus.

Despite such challenges, why don’t the US just shut down the markets for a while like Nepal?

There are some reasons for not shutting down the stock market in the US even though the President has the power to shut down the world's most powerful stock market.

Some accounts in the history, markets have been closed many times due to war, victory, deaths of presidents, the celebration of historical events of significance like the Moon landing and disasters, both natural or manmade such as 4 days closed during 9/11 terrorist attacks and 2 days closed during Hurricane Sandy in 2012. The longest, 4 months, shut down during World War I starting July 1914.

It is important to understand that the market is characterized as the most liquid mechanism of the exchanges even when markets are crashing, investors usually prefer to stay open so they can continue to trade. Ironically, In Nepal, the stakeholders pushed to keep the market closed! which has badly limited the access of liquidity for small investors to manage their needs in lockdown situations.

It would be a praiseworthy action if the regulator directs its stakeholders to work on the implementation of the full-fledged online trading mechanism during this lockdown period. At the same time, we understand that it's easier to said than done! But we have also noted that many financial institutions are providing their services (even though limited) and the healthcare professionals and their services are still open!

Moreover, the Trust is another aspect because the US market is open to ensure it is reliable for global investors. It is the evidence that despite the hardship, the opening of the stock market creates the trust and the reliability in the mind of common investors that they will always have access to their assets and can convert into cash whenever required.

The Bottom-line:

The context and the stories are always changing reasoning the history never repeats! The stories written in the historical financial crashes are irrelevant for the current coronavirus led crisis. Despite strong economic indicators, the world has faced a sudden and never before, health crisis led financial market meltdown. As professor Shiller said, today is a coronavirus. Needless to the state that there is a negative relation between corona virus-infected patients' numbers with the stock market performance. March of 2020 is considered as the most volatile month in the US stock market history. Moreover, we have noted to face the challenges and keep the stock market open to enhance the trust of stock investors with the financial market. We hope the Nepali financial market will open soon and give the opportunities for its investors to participate and experience the crisis time behaviors with the opening the market soon.

Sudarshan Kadariya

Finanacial and Accounting Professional,

Cox and Kings Global Services (CKGS) USA 

For comments: Su.kadariya@gmail.com