It’s no secret that the COVID-19 pandemic has damaged the American and global economies, more specifically the stock and bond markets. All major stock indexes have plummeted in points as investors continue to have less and less confidence in the markets.
Confidence in the stock market is key — it has a major role in dictating the performance of the markets. The lack of confidence among investors leads to investors wanting to sell their stock, but few, if any, are going to buy it. This further decreases stock prices because of supply and demand — a key principle in all economics.
When nobody wants to buy stocks anymore, the demand is gone, and values plummet.
Corporations and investors know that stocks can drop and rise in value; they’re somewhat prepared for a stock market decline. As a solution, they balance their portfolios with bonds, which are loans given by the investor to a company, bank, or the government, both on the local and federal level. These loans are paid back to the investor with a small interest rate after a certain period of time, called a maturity, netting the investor a small profit.
Bonds with longer maturities, like 10-30 years, are usually more secure. Bonds are low-return, low-risk investments, as opposed to stocks, which are high-risk and high-return. Because of the business shutdowns and general lack of money circulating in America, lots of major corporations have begun selling bonds prematurely, for even smaller profits, just to stay afloat. This has caused these seemingly rock-solid bonds to also drop in value, causing losses among investors.
Bonds dropping is a sign of an extremely unstable economy and panic among corporations and investors. Investors have no confidence in the markets, but why?
The COVID-19 pandemic has caused businesses to shut down, from billion-dollar airlines to barber shops. Massive layoffs from businesses have been common — large and small businesses currently just can’t afford to have lots of workers.
The stock market has lost 20% of its total value in 21 days, faster than the Great Depression of 1929, and 10 times faster than the Great Recession of 2008.The Federal Reserve has slashed interest rates on loans like mortgages and credit from 0% to .25%, and President Trump recently signed a $2T stimulus bill to inject the economy with money in an effort to stop the failing markets.
The stock markets have been following an up-and-down pattern: dropping significantly one day and rebounding the next. However, as unemployment rates continue to skyrocket, and confidence is replaced with fear, it seems that a 2008-like recession is coming, and it could very well be much, much worse.
Photo credit: Axios