The stock market is not the economy? Insights from the Covid-19 crisis

During the COVID-19 crisis, while the world economy suffered the worst crisis since the Great Depression, the reactions of stock markets have raised concerns. Several economists (including some Nobel laureates) have seen these reactions as evidence that stock markets are not fully efficient, while others have emphasized the difficulty of assessing the dramatic flow of information about the pandemic and its economic consequences. In this paper, we assess how stock markets have integrated public information about the COVID-19, the subsequent lockdowns and the policy reactions. Although the COVID-19 shock has been global, not all countries have been impacted in the same way, and they have not reacted in the same way. We take advantage of this strong heterogeneity. We consider a panel of 74 countries with daily information about the health and economic crisis, from January to April 2020. Stock market reaction can be summarized as follows. 1) Stock markets initially ignored the pandemic (until Feb. 21), before reacted strongly to the growing number of infected people (Feb. 23 to Mar. 20), while volatility surged and concerns about the pandemic arose; following the intervention of central banks (Mar. 23 to Apr. 30), however, shareholders no longer seemed troubled by news of the health crisis, as prices rebound all around the world. 2) Country-specific characteristics appear to have had no influence on stock market response. 3) Investors were sensitive to the number of COVID-19 cases in neighbouring and wealthy countries. 4) Credit facilities and government guarantees, lower policy interest rates, and lockdown measures mitigated the decline in domestic stock prices. Overall, these results suggest that stock markets have been less sensitive to each country' macroeconomic fundamentals prior the crisis, than to their short-term reaction during the crisis. However, our selected variables explain only a small part of the stock market variations, so it is hard to deny that the link between stock price movements and fundamentals have been anything other than loose.