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The COVID-19 Pandemic of 2020-2022 (B): Reaction of Financial Markets

The COVID-19 Pandemic: Reaction of Financial Markets

Encyclopedia: Capitalism

“The Coronavirus nearly broke the market.”

- Justin Baer, May 21, 2020.

The circumstances of the COVID-19 pandemic as outlined in part (A) of this case study prompted extreme reactions in the global financial markets. Prices across virtually all asset classes fell sharply from February 19 to March 27. Investors grew fearful about adverse trends in economic conditions and uncertain about how governments would respond. In many previous crises, investors sold risky assets (such as stocks) and bought “safe” financial assets (such as U.S. Treasury securities). In contrast, in early 2020, investors sold all assets and simply wanted to hold cash. This so-called “dash for cash”1 triggered a deep financial crisis: market-makers were unprepared to provide the immense liquidity that investors called for. “The average investor turned more pessimistic about the short-term performance of both the stock market and the real economy. Investors also perceived higher probabilities of both further extreme stock market declines and large declines in short-tun real economic activity,” wrote Stefano Giglio et al.2 Markets began to seize up because of the imbalance of many sellers and few buyers. Prices plummeted. Fears of deflation spread as prices of oil, transportation, goods, and services fell sharply.

Rising to the challenge, central banks began to implement special programs aimed at infusing the markets with liquidity. Governments also deployed a host of social safety net programs and fiscal stimulus efforts. Beginning on March 24, 2020, and continuing through April 2022, financial markets recovered sharply and then sustained a boom in prices—the market recovered its losses by August 21, 2020. Researchers found that up to 40% of stimulus checks were saved by individuals—and that 10% to 15% of the savings went into the stock market.3 From the nadir on March 23 to April 5, 2022, the S&P500 Index rose 101%. Niall Ferguson later judged that the “monetary and fiscal measures were palliatives, not stimulus. Their principal effect was to decouple asset prices from economic reality and (perhaps) sow the seeds of future financial instability and inflation.”4

What fueled the seemingly manic movements in stock prices? One view, long espoused by Nobel Laureate in Economics Eugene Fama held that stock prices reflected estimates of the discounted value of future dividends and that material changes in stock prices reflected the arrival of news regarding the outlook for dividends. Because news arrived randomly and unexpectedly, returns on shares of stock would tend to follow a random walk—this meant that in statistical terms there would be little or no correlation in returns from one period to the next, unless a truly major event triggered a widespread revision in outlook. In short, by this view, booms and crashes were simply revisions in rational expectations by investors that might be corrected with the arrival of new news. Some analysts argued that the implication for government policy would be to leave securities markets alone to correct for themselves.

On the other hand, Nobel Laureate Robert Shiller and others held that the daily returns on stocks were more volatile than justified by changes in dividends and expected cash flows. The movement of stock prices reflected emotions and changes in popular narratives. Nobel Laureate Daniel Kahneman and Amos Tversky had documented numerous cognitive biases that caused pricing anomalies. Such findings might justify greater government surveillance and intervention in securities markets.


  1. Go to the Excel spreadsheet, “COVID2020 STUDENTv21.xlsx,” and find the tab, Exhibit B1, that contains daily data on the stock market index, S&P500.
    1. Graph the movements in the Standard and Poor’s 500 Index (S&P500) during the “dash for cash” from February 19, 2020 to March 27, 2020.
    2. Identify dates of large movements in this stock market index of prices. Consult the calendar of events in Exhibit B2 of this case to assess the possible events to which the stock market responded.
  2. How much of the movement in the S&P500 Index was due to ordinary trading “noise”? Test for the statistical significance of daily returns in the S&P500 over the “dash for cash” period (February 19 to March 27, 2020.)
    1. a. First, convert the daily dollar changes in the index value into percentage changes.
    2. Second, find some benchmark statistics against which to determine the significance of the daily percentage changes. For instance, compute the mean and standard deviation of daily returns during a hold-out period, such as November 15, 2015 to December 31, 2019.
    3. Third, compute a measure of statistical significance of daily returns during the pandemic years.  A typical test statistic is the “Z-score,” which measures the number of standard deviations away from the mean for each daily return.  The formula for this statistic is
      1. ZT = (RT/σ)
      2. where RT is the return on the S&P for day T, is the average of all daily returns for the hold-out period, σ is the standard deviation of all daily returns for the holdout period, and ZT is the Z-score for day T.
    4. Fourth, identify the trading days during the pandemic during which the stock market demonstrated returns that had significantly large (positive or negative) Z-scores. Consult any of the Z-score probability converters on the Internet to determine the probability associated with any particular Z-score.5 Conventionally, Z-scores larger than +/- 2.0 are associated with a 5% chance or less that the daily return could be due to trading “noise” (the random daily variation in prices).
    5. Fifth, code each trading day for whether the news was probably positive (leading to price increases), negative (leading to price decreases), or indeterminate. What percentage of the significant daily returns were associated with material positive or negative news?
    6. Interpret. For the days with significant returns, consult the calendar of daily events in Exhibit B2. What was going on then? Why do you suppose the stock market moved as it did? Why might the stock market react to such news?


Exhibit B1

Exhibit B2

Timeline of the Financial and Economic Crisis of 2020-20216

Note: The following list of events covers only selected notable developments. For the sake of brevity, many other less significant events in the U.S. and globally are excluded.

Jan. 4, 2020: Local health officials in Wuhan, China, declared an outbreak of a viral pneumonia strain—later determined to be the first 27 cases of COVID-19.

Jan. 21, 2020 : Chinese authorities confirmed human-to-human transmission of the novel coronavirus. US CDC reports first confirmed US case, a man in Washington State who fell ill four days after returning from Wuhan.

Jan. 22, 2020: Chinese authorities imposed a nationwide lockdown

Jan. 23, 2020: Beijing banned movement into and out of Wuhan. First U.S. case of COVID-19 was identified.

Jan. 28-29, 2020: Federal Open Market Committee met and expressed confidence about economic conditions.

Jan. 30, 2020: World Health Organization declared COVID-19 outbreak to be a Public health emergency of international concern. The yield curve on U.S. Treasury securities inverted, implying that a recession was likely—this followed report by analysts in 2019 of a slowdown in US economic activity, which some declared would turn into a recession in 2020.

Jan. 31, 2020: Secretary Azar declared a public health emergency for the U.S. from COVID-19. As prearranged, the UK leaves the European Union.

Feb. 5, 2020: U.S. Senate acquitted President Trump of articles of impeachment.

Late Feb., 2020: Early cases of Covid-19 detected in South Korea (Feb. 17), Iran (Feb. 19), and Italy (Feb. 20).

Feb. 19, 2020: S&P500 Index hit an all-time high. Credit spreads reached a record low.

Feb. 20, 2020: Selling trend commenced in financial markets.

Feb. 22, 2020: G20 meeting of finance ministers in Saudi Arabia.

Feb. 23, 2020: Peter Navarro, adviser to President Trump, wrote, “We face a significant probability of a serious pandemic coronavirus event in the U.S. that may extend well into 2021” and warns of many lives lost. [Tooze 65-78]

Feb. 24, 2020: (Monday) News that the COVID-19 had spread significantly outside of China.

Feb. 25, 2020: (Tuesday) Dr. Nancy Messonier, director of CDC’s National Center for Immunization and Respiratory Diseases said, “It’s not so much of a question of if this will happen anymore, but rather more of a question of exactly when this will happen and how many people in this country will have severe illness.” Larry Kudlow said, “We have contained this—I won’t say airtight, but pretty close to airtight…I don’t think it’s going to be an economic tragedy at all.”7 U.S. Business confidence fell to 37.3 from 56.2 at the end of January.

Feb. 26, 2020 (Wednesday) Powell convened the first Covid-19 crisis-planning meeting at the Fed. Richard Clarida said, “if…we shut down the entire economy, then this will be a bigger hit than the Great Depression.”8

Feb. 28, 2020: Stock markets reported the deepest one-week declines since 2008 Global Financial Crisis: for instance, the Dow Jones Industrial Average fell 12.4%. Fed Chairman Powell issued a statement signaling that the Fed was ready to cut rates. He stated that the Fed is “closely monitoring economic developments and evolving risks…the coronavirus poses evolving risks to economic activity…[and the Fed] will use its tools as appropriate to support the economy.”

Feb. 2020: An economic recession began, according to the National Bureau of Economic Research. It lasted three months, the shortest on record.

Mar. 2, 2020: Bank of Japan announced the intention to purchase up to ¥500 billion ($4.6 billion) of government debt.

Mar. 3, 2020: The Federal Open Market Committee met in an emergency session. The committee agreed to extend short-term loans into the repo market, reopen dollar swap loans to five foreign central banks, and lower the Fed Funds Rate by 50 basis points. Mnuchin convened a meeting of G7 finance ministers, who published a statement reaffirming plans to use “all appropriate policy tools” to address the impact of the outbreak. Australia, Malaysia, Indonesia, South Korea and Mexico commenced monetary actions.

Mar. 4, 2020: Canada, Saudi Arabia, and Brazil announced monetary responses. The IMF announced a $50 billion credit line to assist emerging market countries.

Mar. 5, 2020: President Trump signed an emergency appropriations act allocating $8.3 billion to additional government spending. Argentina commenced monetary policy responses.

Mar. 6, 2020: A price war between OPEC and Russia began as the two sides failed to reach agreement on oil production cuts in response to the crisis.

Mar. 7, 2020: Saudi Arabia and Russia both announced increases in oil production.

Mar. 9, 2020: Fed interventions in repo market began: the Federal Reserve Bank of New York offered $150 billion in overnight repo funding. The price of oil fell 22% and unleashed a wave of selling on Wall Street. Dow Jones Industrial Average declined 7.79%9–this was the largest one-day absolute decline in the index until then. S&P500 was reported to be in “freefall.”10 The declines triggered “circuit breakers.”11 Stock markets around the world fell sharply. Fed provided $150 billion in repo funding. Central banks in Russia, Brazil, Japan, and Indonesia announced additional monetary stimulus programs.

Mar. 10, 2020 Fed announced increase in funding for repo market from $150 billion to $175 billion.

Mar. 11, 2020 Fed increased overnight repo funding as announced the day before and added $95 billion in two-week and one-month repo loans. The World Health Organization officially declared the onset of a global pandemic. President Trump imposed a travel ban on goods and passengers from Europe.

Mar 12, 2020 Christine Lagarde, President of the European Central Bank, alarmed the markets by stating “We are not here to close spreads.” Stock markets tumbled around the world. Dow Jones Industrial Average declined 9.99%, triggering a circuit breaker in trading. Fed offered 1-month and 3-month repo funding12 in $500 billion batches (decision announced on March 11).

Mar. 13, 2020: President Trump declared a national emergency and suspends entry to the US by foreign nationals. Leaders in Russia, Saudi Arabia, Turkey, Mexico, Canada, Brazil, Japan, and Indonesia announced additional monetary responses as well as the intention to undertake fiscal stimulus policies. Nancy Pelosi, Speaker of the U.S. House of Representatives declared the intention to bring forward a bill for additional social safety net provisions and economic stimulus. Mnuchin said on CNBC’s Jim Cramer show, “Whatever we need to do, whatever the Fed needs to do, whatever Congress needs to do, we will provide liquidity and this will be an entire whole-of-government approach led by the president.” [Trump] declared in a Rose Garden speech that the pandemic was a national emergency: “Two very big words.” He announced plans to surge the production of testing kits, and he tried to project calm. “We’ll remove or eliminate every obstacle necessary to deliver our people the care that they need and that they’re entitled to. No resource will be spared,” he said.

Mar. 15, 2020: Powell called an emergency meeting of the Federal Open Market Committee, to propose a (a) 1 percentage point rate cut, (b) purchase $500 billion in Treasury securities and at least $200 billion in mortgage securities; (c) cut the discount rate to a quarter percentage point; (d) initiate inexpensive dollar swap loans with five more central banks; and (e) relax regulatory restrictions to encourage banks to lend. Recommendations were approved and announced at 5:00 pm that day—unusual for a Sunday. In response, the equity futures market sold off and triggered a halt in market trading.

Mar. 16, 2020: Markets fell sharply again—Dow Jones industrial average declined 12.93%. This triggered circuit breakers again. A “catastrophic Monday.” The eight largest banks reported that they borrowed from the discount window, not because they needed it, but because they wanted to remove the stigma for other banks to borrow there.

Mar. 17, 2020: Fed announced the establishment of a Commercial Paper Funding facility with up to $1 trillion in funds. Fed also expressed support for payroll and other short-term expenses by businesses.

Mar. 18, 2020: President Trump declared that “America is at war.” The UK pound falls against the dollar to the lowest level since 1985 “Unusual discrepancies” emerge in the pricing of UK gilts because dealers are unable to “equilibrate” the market, resulting in a “near meltdown.” The European Central Bank commenced a bond-buying program of €750 million, which observers deemed a “revolution” in ECB monetary policy. German Chancellor Merkel declared support for “a large reconstruction and resiliency fund,” but not jointly-issued bonds.”13 Fed announced a widening of credit support to include mutual funds.

Mar. 19, 2020: Fed announced widening of currency swap lines to include 14 countries, including Mexico, Brazil, and South Korea. Bank of England announced program to buy £200 billion in gilts (UK government bonds).

Mar. 20, 2020: The Fed announced an expansion in the Money Market Mutual Fund Liquidity Facility to include loans to funds secured by high quality securities issued by states and municipalities. Six major central banks announced coordinated program of support to financial markets. The U.S. Internal Revenue Service declared that the deadline for annual tax filings would be delayed from April 15 to July 15.

Mar. 22, 2020: U.S. financial regulators announced relaxation of rules limiting loan modifications.

Mar. 23, 2020: This day marked the nadir of the U.S. stock market decline. From Feb. 19, 2020, the value of global equities had fallen by $26 trillion14—this compared to the value of all listed equities on world markets of about $85 trillion15 at the end of 2019. Fed announces nine facilities to backstop credit markets: expanded loans to automobile lenders, credit card lenders, small businesses, students, large employers (like airlines), and it invoked Section 13(3) of the Federal Reserve Act to draw on the Treasury’s Exchange Stabilization Fund. The major novelty was the Fed’s commitment to buy corporate debt directly in the primary market and in the form of ETFs. The Fed expressed a policy of “using its full range of tools…[and] aggressive efforts…to provide powerful support for the flow of credit,”16 marking a turning point in monetary policy.

Mar. 24, 2020: Stock markets rose sharply: 11% one-day gain for the Dow Jones Industrial Average and 9% for the S&P500 Index.

Mar. 25, 2020: The U.S. Senate unanimously approved the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act), which would inject $2.2 trillion17 into the U.S. economy18. Later, the International Monetary Fund estimated that fiscal stimulus programs by countries adds $14 trillion to the global economy. Nine countries within the European Union called for the issuance of common debt instruments (Germany and the Netherlands disagreed).

Mar. 26, 2020: Department of Labor announced a ten-fold rise in applications for unemployment benefits compared to the week before, to over 3.283 million.

Mar. 27, 2020: The U.S. House of Representatives passed the fiscal stimulus package passed by the Senate two days earlier. President Trump signed the CARES Act this day.

Mar. 29, 2020: Trump announced a general lockdown.

Apr. 2, 2020: Weekly unemployment insurance claims rose to 6.6 million, the highest in history of the series.

Apr. 3, 2020: The Small Business Administration began processing loans under the “Paycheck Protection Program,” which was authorized by the CARES Act. Such loans were forgiven if employees were kept employed for eight weeks and if the money was used for payroll, rent, mortgages or utilities. Over the weekend of April 4-5, banks submitted thousands of PPP applications to the SBA portal. A few days later, the Treasury warned that the fund would be exhausted in two weeks. A week later, Congress added $310 billion in PPP funding.

Apr. 9, 2020: Fed announced the $600 billion “Main Street Lending Program” to provide up to $2.3 trillion in loans to assist credit flows to households and employers.
Apr. 28, 2020 The Federal Open Market Committee met, after which it reaffirmed its program of aggressive purchases of Treasury securities and mortgage-backed securities as well as large-scale repo operations. Powell began to emphasize the importance of more fiscal stimulus. US confirmed 1 million cases of COVID-19, the first country to reach that level. President Trump invoked the Defense Production Act to compel meat and poultry processors to continue operating.

May 8, 2020: Department of Labor issued the May employment report that employment fell by 20.5 million in April and that the unemployment rate rose to 14.7%, the largest one-month slump in jobs since these seasonally-adjusted data began in 1948—qualitatively, unemployment rose to levels not seen since late in the Great Depression.

May 25, 2020: George Floyd was killed by a police officer, igniting “Black Lives Matter” protests in over 2,000 American cities over the following summer.19

June 5, 2020 The Bureau of Labor Statistics delivered a major positive surprise, that employment rose 2.5 million in May and that the unemployment rate had declined to 13.3%–this was in contrast to an expected loss of over 8 million jobs for May, and an increase in unemployment to 19.7%.

June 9-10, 2020 The Federal Open Market Committee convened and issued a message nearly identical to the April FOMC meeting, indicating that it would continue the current policy stance. Powell announced an expectation that economic recovery would begin in the second half of the year.

June 15, 2020 Fed announced a market-index-based plan to purchase corporate debt securities. This was a major departure from previous practice, which had been limited to purchasing U.S. Treasury securities or government-guaranteed mortgage-backed securities.

Jul. 2021: Daily COVID cases in the U.S. surpassed 50,000. President Trump signed an extension of the Payroll Protection Program (July 4). German Chancellor Merkel announced a change in policy and supported financing the emergency fund by issuing debt jointly guaranteed by EU member countries. The Fed extended operation of seven emergency lending programs20 (July 28).

Aug. 27, 2020: Fed Chairman Powell announced a revision to Fed targets: long-term average inflation of less than 2% (as opposed to earlier policy of short-term marginal inflation of 2%).

Fall 2020: Second surge in COVID cases.

Nov. 2020: Various financial market indexes returned to levels comparable to January 2020.

Nov. 3, 2020: Presidential election day in the U.S. Joe Biden is eventually declared the winner over President Donald Trump.

Nov. 9, 2020: Pfizer/BioNTech vaccine was declared successful in trials.

Nov. 13, 2020: 25 Corporate CEOs called for every vote to be counted.21

Nov. 23, 2020: AstraZeneca vaccine was declared successful in trials.

Nov. 30, 2020: The Fed extended again several lending facilities to give continued stimulus to the economy.

Dec. 27, 2020: President Trump signed an extension of the CARES Act.

Dec. 2, 2020: COVID hospitalizations exceeded 250,000, a new record.

Dec. 11, 2020: U.S. Food and Drug Administration (FDA) authorized the Pfizer-BioNTech COVID-19 vaccine for emergency use in people 16 years and older.

Dec. 16, 2020: Fed extended various international swap lines in U.S. dollars.

Dec. 18, 2020: FDA authorized a second vaccine, produced by Moderna, for use in people aged 18 years and older.

Dec. 23, 2020: CDC reported that over one million people in U.S. have received a first dose of vaccine.

Dec. 27, 2020: President Trump signed the Coronavirus Response and Relief Supplemental Appropriations Act, to give another round of financial support to individuals and organizations. [how many $$ ? $900 bn?]

Dec. 30, 2020: China and the EU signed the “Comprehensive Agreement on Investment,” aimed at boosting foreign direct investment.

Jan. 2021 Daily COVID cases and mortality from COVID surge again. Distribution of a first dose of vaccine sharply increased this month.

Jan. 20, 2021: Joe Biden was inaugurated as President of the U.S. He signed eight executive orders mandating, among other things, social distancing and the wearing of masks.

Mar. 2, 2021: Texas Governor Greg Abbott issued an executive order lifting the state’s mask requirement, the fifth state to lift orders (after Montana, Iowa, North Dakota, and Mississippi). President Biden invoked the Defense Production Act to speed vaccine production.

Mar. 11, 2021: President Biden signed the American Rescue Plan into law. $19. Trillion package. Among other features, this plan gives $1,400 per-person checks to needy individuals.

Apr. 27, 2021: CDC issued relaxed safety guidelines for vaccinated people.

May 12, 2021: Labor Department reported that the consumer price index had risen 4.2% in April, compared to a year earlier.

May 13, 2021: CDC announced further relaxation of safety guidelines for vaccinated people.

Jun. 25, 2021: Fed announced a final extension of its Paycheck Protection Program facility to banks making loans under the Paycheck Protection Program.

Aug. 20, 2021: CDC reported that at least 200 million people have received at least one vaccine dose.

Nov. 15, 2021: Congress passed, and President Biden signed, a bill committing $1 trillion in Federal spending toward infrastructure development. The bill had gained bipartisan support.

Nov. 26, 2021: World Health Organization declared the Omicron variant of COVID a “variant of concern.” The Dow Jones Industrial Average fell 2.5%.

Feb. 2022: Civil unrest and violent truckers’ strikes in Canada (and later, the U.S.) sprang from popular resistance to government regulations regarding vaccination, mask-wearing, and social distancing.

Feb. 8, 2022: CDC reported that over 900,000 people had died from COVID-19 in the U.S.

Feb. 24, 2022 Russia invaded Ukraine.

Apr. 19, 2022: A U.S. judge struck down remaining Federal Government mandates regarding face masks and social distancing on public interstate transportation.


1 “Dash for cash” was a phrase in broad usage at the time. Choi, Johnson, Murphy, Zalasky, 2021. Also see De Jesus et al. 2020.

2 Giglio et al. 2020, 1.

3 Greenwood et al. 2022, 2.

4 Ferguson, 2021. 287.

5 See, for instance, “Z-score and Probability Converter,” at https://www.calculator.net/z-score-calculator.html?c2z=2&c2p=&c2pg=&c2p0=&c2pin=&c2pout=&calctype=converter&x=73&y=17#converter.

6 You can find exhibit B1, S&P500 Index, in the associated Excel spreadsheet, “COVID2020 STUDENTv21.xlsx.

7 Both quotations from Timiraos, 7

8 Timiraos, 9

9 In comparison, the standard deviation of daily returns on the S&P500 index from 2016 to 2021, for instance, was only 1.16%. Thus, a decline of 7.79% was 6.7 standard deviations from a mean return of zero, or about the likelihood of two in a million that the market movement that day was just due to the usual noise in the market.

10 Tooze, Shutdown, 80).

11 A “circuit breaker” is an emergency regulation that halts trading in financial markets in order to quell panicked selling or manic buying. In 2020-2022, circuit breakers would trigger if one-day declines in the S&P500 stock index fell 7% and 13% (for 15 minutes) or 20% below its previous-day closing value (closed for the rest of the day).

12 “Repo funding” is a form of short-term borrowing (usually just over night) in which the borrower pledges government securities in return for cash from the lender. “Repo” refers to a repurchase agreement between a lender (who effectively buys the government securities) and the borrower (who promises to repurchase the securities the next day at a higher price.) Repo funding is a major source of liquidity in financial markets.

13 Tooze 180, 184.

14 Tooze, 120.

15 Jesse Pounds, Dec. 26, 2019, “Global Stock Markets Gained $17 Trillion in 2019” Global stock markets gained $17 trillion in value in 2019 (cnbc.com).

16 “Federal Reserve Announces extensive new measures to support the economy,” Press Release, March 23, 2020, https://fraser.stlouisfed.org/archival-collection/board-governors-federal-reserve-system-6116/federal-reserve-announces-extensive-new-measures-support-economy-589400.

17 The CARES Act originally authorized spending $2.2 trillion, which was later expanded to $2.7 trillion.

18 Tooze 131, 136.

19 History.com. https://www.history.com/this-day-in-history/george-floyd-killed-by-police-officer

20 Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Paycheck Protection Program Liquidity Facility, and the Main Street Lending Program.

21 CBS News, “Corporate CEOs Press Lawmakers to Ensure Every Vote Will be Counted,” downloaded November 9, 2021 from CEOs may press lawmakers to ensure smooth transition to Biden – CBS News.