Stock markets over time tend to reward investors with financial gains. But the COVID-19 pandemic has thrust markets into uncharted territory.
By Betty Wong
Stock markets are typically viewed as an economic oracle, able to foresee the state of a company or the overall health of a country’s economy six to nine months ahead.
During a bull market when share prices are rising, companies and investors are optimistic. Some government leaders consider the financial markets in their country to be a kind of report card on their own work, and they are apt to boast about how they have enriched citizens’ buying power.
Conversely, a sustained downtrend in stocks can signal a bear market. Investors can fret over whether to sell stocks for a loss or hold on in hopes of a recovery. Those same government leaders may stay silent during bear markets — or blame others.
Uncertainty is the biggest enemy of a stock market, and that is where we are now. Although in the past share markets endured the Great Depression, recessions and terror attacks, the COVID-19 pandemic has crippled the global economy and sent stock markets into unprecedented territory.
Are stock markets still the best barometer for an economy?
They are one piece of the puzzle, but stock markets are probably a better gauge of public sentiment — whether or not there is a COVID-19 pandemic.
If people are feeling positive about the economy and their prospects, they are more willing to take financial risks and buy stocks. As stock prices rise and more investors jump into the market, companies will take out loans, hire more people and spend money to develop and churn out more products. Consumers will buy those products, and that will help companies’ earnings and profits.
Why do people invest in stock markets? Why are my parents worried about stocks?
Stocks are financial stakes in companies. They can be risky investments, but they generally offer higher returns than bonds, which are considered safer. Over time, stock prices can fluctuate but tend on the whole to rise.
People can buy stocks in individual companies, index funds tied to broader stock market indices or baskets of stocks in mutual funds managed by professionals. People generally invest in stocks to build savings for major life events like down payments for homes, kids college funds and retirement.
Parents might receive or buy stock or stock options from their employers, so they are tied more closely to how well their employer is doing. When stock markets fall sharply or grind lower over time, investors worry about losing their savings.
Do most people own stocks?
The biggest stock markets in the world include the New York Stock Exchange, Nasdaq, Tokyo Exchange Group, Shanghai Stock Exchange, Hong Kong Stock Exchange, London Stock Exchange and Euronext.
Even though the United States has the two largest stock markets in the world by far, only about half of Americans own individual stocks or mutual funds, or hold shares in their retirement plans.
A 2010 study by the Organisation for Economic Co-operation and Development (OECD) showed relatively few citizens in rich countries owed shares traded on their domestic stock markets.
According to Goldman Sachs, the richest one percent of Americans own more than half the value of equities owned by U.S. households.
Should savings be more diversified? Where else do people invest?
“Don’t put all your eggs in one basket” is an old adage warning against putting all your resources into one area at the risk of losing everything.
A major non-financial investment for many people in OECD countries is real estate, whether dwellings for themselves or land. Other alternative financial investments include bonds, commodities such as gold or silver, and certificates of deposit or money market accounts.
Why invest in corporations? I think they’re greedy and destroy the environment.
Before tarring all companies with the same brush, do some research.
At the very least, most websites for publicly traded companies highlight their corporate and social responsibility, community involvement and diversity achievements. It’s good public relations, and it’s good business as well.
Some people buy a single share of a company for access as a shareholder — the ability to request a copy of the company’s ledgers, list of stockholders and other records; to attend shareholder meetings; to vote on certain issues such as the selection of board members; and to speak and stay informed about the company’s policy decisions, among other rights as an investor.
There are also “green funds,” mutual funds with holdings only in companies deemed socially and environmentally responsible.
How have stock markets responded in an analogous periods?
The chart below shows how an index representing large- and mid-cap companies around the world performed before, during and after recent epidemics.
However, stock markets are in uncharted territory with COVID-19. Entire industries have shut down, more than a billion people around the world are locked down at home, there is record unemployment in major economies and earnings forecasts for many companies are dire.
Where do you see the MSCI World Index going in the next six months?
(For more stories on COVID-19, click here.)
Betty Wong was global managing editor of Reuters from 2008-2011, with 29 years of experience at the Wall Street Journal and Reuters. She covered white collar crime on Wall Street from Ivan Boesky to Michael Milken in the 1980s, led U.S. corporate news coverage from the dot com bubble to rubble and was global equities editor for Reuters.