The Corona Virus, the Stock Market’s Response, and Growth Expectations

We use data from the aggregate equity market and dividend futures to quantify how investors’ expectations about economic growth across horizons evolve in response to the corona virus outbreak and subsequent policy responses. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a simple forecasting model. We show how the actual forecast and the bound evolve over time. As of March 16, expected growth over the next quarter declined by 2.5% in the US and 3.5% in Europe (both annualized) compared to the beginning of the year. The lower bound on expected GDP growth has been revised down by as much as 10% in the US and 12% in the EU. There are signs of catch-up growth from year 4 to year 10. News about economic relief programs on March13 appear to have increased stock prices by lowering risk aversion and lift long-term growth expectations, but did little to improve expectations about short-term growth.The events on March 16 reflect a deterioration of fundamentals in the US and predicta deepening of the economic downturn. We also show how data on dividend futures can be used to understand why stock markets fell so sharply, well beyond changes ingrowth expectations