About a year ago, COVID-19 hit the financial markets and caused a massive crash. Investors fled in droves from almost all asset classes, and panic took over the regime on the stock exchange. Only 12 months later, the financial market is in exceptional shape – but the crisis has also significantly changed investor behavior.
• Crash in all asset classes around a year ago
• Significant recovery, in some cases to new record highs
• Is the crisis over?
The year 2020 will go down in history as a historic year – also and especially when it comes to the stock market. Where are the markets around a year after the crash? Which asset classes have been hit particularly hard and where are there even crisis profiteers?
Stock market hit hard – but the crisis did not last
How the corona pandemic caused a stir on the stock market can best be seen in the development of share prices. In December 2019, news of a new virus called COVID-19 hit many people’s minds. But it would be almost three months before the stock exchanges reacted to the threat: The crisis hit the financial markets late.
There were massive, unmistakable consequences on the German stock market on March 18, 2020 – on this day the German benchmark index DAX fell to 8,442 points, around a month earlier the stock market barometer had stood at around 13,800 points. Within three weeks, the index lost around 40 percent, investors reacted in panic and withdrew their money from stocks on a large scale.
Similar developments could be seen not only in Germany, but on the stock exchanges around the world: The US leading index Dow Jones fell to 18,592 points on March 20, around a month earlier the stock market barometer had reached 29,348 points .
The crisis was there, but the crisis did not last long – investors who kept their nerve and did not rush to liquidate all their equity investments were rewarded for their courage. Anyone who even used the situation to buy more shares benefited all the more, because the recovery was not long in coming. In the following weeks, the markets started a recovery rally that even experts hadn’t expected. At the end of the year, the German stock exchanges were quoted at pre-crisis level again, in the USA the markets managed this even earlier. And this despite the fact that many statisticians had previously pointed out, with a view to past crises, that it would probably take around two years before the stock exchanges were quoted at the level before the pandemic-induced slump.
And the markets not only compensated for the losses from the corona crash within a short period of time, but also mostly set new records. The DAX shot up to 14,804 points in mid-March, a value that was 75 percent above the index level from around a year ago.
The Dow Jones was also able to advance to 33,228 points on March 19, reaching heights that had never been reached before, increasing by 69 percent compared to the crisis level in the midst of the corona pandemic in March 2020.
There were several reasons for the rapid market recovery. Lockdown measures around the world have robbed people of their recreational opportunities. With amusement parks, cinemas or casinos closed, and a drastic reduction in travel, an extraordinary situation arose: Many people around the world suddenly had more money at their disposal, which they could invest in their hobbies and hobbies before the pandemic, even though the crisis hit the job market hard Had invested free time. In addition, there was a flood of money from the central banks, which ensured that the low interest rate environment continued, and there were also massive economic programs, in the USA, for example, accompanied by stimulus checks to boost consumption. Low interest rates on the account, a bond market that does not yield anything, combined with money that cannot be invested in leisure activities, led to a run on the stock market – numerous people have invested in stocks for the first time since the corona pandemic.
A new class of investors was created – the German Stock Institute made up the group of under 30s who were particularly active on the stock market in the Corona year. This became evident at the end of January, when a flood of small investors, who had colluded via the Reddit sub-forum r / WallStreetBets, caused a sensation in the markets and even put established hedge funds with their short strategies in financial distress. According to a recent study, many of the users who frequently used trading apps such as Robinhood were “uninformed” on the stock market. Much of the movement was new to the stock market, noted Oklahoma State University’s Gregory Eaton and Brian Roseman, along with T. Clifton Green and Yanbin Wu of Emory University.
Not all stocks benefit equally
But the flood of new shareholders and the policies of the central banks combined with extensive economic stimulus programs in the countries are not the only reasons for the stock market boom that followed the crash quarter of 2020. This can be seen by looking at the stocks that primarily benefited or were responsible for the rally. Because the recovery – like the previous bull market – was driven in particular by tech stocks. Particular attention was paid to companies that have benefited from the corona crisis thanks to their business models: cloud providers, for example, or streaming companies, as well as providers of online courses or software or portals with online services, internet retailers, providers of video conferencing Systems, ect. Pharmaceuticals and biotech companies were also among the most popular investment segments on the market.
These companies drove the V-shaped recovery on the stock market, while economically sensitive industries such as the tourism segment, airlines and retailers underperformed the markets significantly during this period. The car industry was also hit hard by the crisis, which was due in particular to the shortage of semiconductors. Electric car manufacturers such as Tesla, meanwhile, bucked the trend and not only reached unimagined record highs, but also played a decisive role in driving the market development in the tech sector.
But the fact that not all industries have caught up with the recovery could point to a continuation of the equity rally. Because with the increasing vaccination penetration of the population, lockdown measures will be more and more weakened and ultimately completely suspended. Travel providers and airlines, but also retailers, will then have enormous potential to catch up; the losers of the lockdowns could become tomorrow’s winners.
At the same time, the high flyers of the past few months are still worth a look, because the corona crisis may have caused long-term change in the digitization of the world of work, schools or even in online retail, so that companies from these industries will continue to develop strong business developments in the future should show.
In addition: The monetary policy of the central banks is unlikely to change in the near future, it is to be expected that the low interest rate environment will persist for some time to come, which keeps equities attractive from an investor’s point of view.
Crisis brings cryptocurrencies a decisive step forward
Not only did stocks get a new upswing after the Corona crash quarter of 2020, the cryptocurrency market saw a particularly significant upward trend in the following months. As a result of the panic in the market, the world’s largest crypto currency Bitcoin fell to 5,402 US dollars in March, falling by around 40 percent within a month.
But – analogous to the stock market – the digital currencies also began to recover after the crash, albeit later. On the other hand, the race to catch up was much more rapid than with the asset class stocks. At its peak, the largest industry representative, BTC, went up to 61,254 US dollars and Bitcoin is currently trading around 900 percent above its crisis low. All cryptocurrencies together have now reached a market value of over a trillion dollars.
In particular, Bitcoin, the oldest cryptocurrency, was increasingly given the status of a “safe haven” in the months after the crisis. Many investors bet on BTC as a potential means of payment in the future. The fact that companies like Tesla invested in cryptocoin but also the increasing market penetration brought Bitcoin to the top of the shopping lists of many market participants.
In fact, the rapid rally on the cryptocurrency market, which drove Bitcoin & Co. to ever new record levels, is also accompanied by increasingly warning voices. The fear of a bubble does not seem to have reached the broad market yet, because this year alone, Bitcoin was able to gain 85 percent, even though the digital currency already cost many times more at the start of the year than what investors in the midst of the Corona- Crashes in the past year had to put on the table for a coin.
As far as the potential further price development for Bitcoin is concerned, the expert estimates are clearly ambivalent: From six-digit price forecasts to predicting a complete crash, everything is possible, opinions differ on cryptocurrencies. Nevertheless, at least in the short to medium term, it should not be expected that interest in the crypto market in general and in Bitcoin in particular will decline. The public interest remains high and with the increasing opening of the market for Bitcoin as a means of payment, market penetration is likely to increase further. The macro environment remains intact as long as many investors are worried about inflation and the FOMO effect does not lose its shine.
Gold with the handbrake on
When the panic hit the financial markets in March 2020, it only briefly looked as if the commodity gold, which has become known as the crisis currency, could escape the fall in prices. But the gold price also corrected sharply in the midst of the crisis, between February and March the precious metal lost around nine percent of its value. Here, too, there was a massive price recovery in the following months, which drove gold to new highs. The raw material cost over US $ 2,063 per troy ounce in the summer of last year. But the price rally was short-lived, instead disillusionment returned quickly on the gold market: While stocks and digital currencies are in some cases significantly more expensive today than before the Corona crash, the gold price is currently also above its level at 1,732 US dollars per troy ounce Pre-crisis levels, but shows a clear underperformance compared to the other forms of investment. Even if experts consider a further rise in the price of gold to be possible, it remains to be seen that gold must at least share its status as an original safe haven asset. Because Bitcoin is now said to have similar properties as an inflation protection. The fact that the digital currency performed so much better than gold could also be explained by the fact that many investors have shifted their investments.
While the sell-off in March of last year stretched across all asset classes, there is hardly an asset that has hit the crisis as hard as the price of oil. In April 2020, the price of black gold was negative for the first time in history – on that day, oil traders were forced to pay investors on the commodity exchange to sell them oil. At its peak, a futures contract fell to -40 US dollars, something that had never happened before during the Great Depression. And even if the oil price heralded a recovery in the following months: At the end of the year, the price of black gold had not yet reached its pre-crisis level, by which time the stock market had long been back on record. A barrel now costs more than it did in February 2020 before the sudden crash on the market, but new price records are a long way off. Oil is currently trading at around US $ 60; in 2008, investors were still paying US $ 147 per barrel – a price that has never been reached since then. That begs the question of whether oil is past its prime. Numerous branches of industry are still dependent on energy from fossil fuels, but their share is falling. The corona crisis has exacerbated this problem, because the production stop in numerous factories around the world has reduced demand for crude oil. Added to this is the increasing environmental awareness of many people, which also plays a role in this context, because the call for renewable energies is getting louder and louder. The analysts’ estimates for the price development for oil are correspondingly mixed: While some experts consider an oil price north of the 100 dollar mark to be possible, the International Monetary Fund IMF, for example, believes that the price range is between 40 and 50 US dollars.
Corona crisis already over?
When looking at the development of various assets during the period of the pandemic, one thing in particular becomes apparent: The crash around a year ago affected almost all asset classes, and investors were selling off investments on a broad front. But the markets reacted hesitantly to COVID-19, and it wasn’t until about a quarter of a year after the first infections in China that uncertainty began to spread on the trading floor. While governments around the world responded with lockdown measures, central banks around the world made enormous efforts to cushion the effects of the crisis, which acted as a sedative for many investors. In fact, the traces of Corona on the financial market were not as deep as might initially have been feared, many asset classes have reached their pre-crisis level again or in some cases even significantly exceeded it. Even if the market looks astonishingly good about a year after the crash quarter for stocks, commodities, crypto currencies, etc., the question of long-term consequences still remains. Because not all companies have survived the crisis well, experts are expecting a wave of bankruptcies. Companies that lose touch with the digital transformation may also have to file for bankruptcy with a time delay, the business development of some corporations will probably be worse for the foreseeable future than before the crisis, the global economy will probably suffer from the consequences of the crisis for some time to come. But as of now it can be said: Many investors have ticked off the crisis, the market has won numerous new shareholders and the pandemic acted as a catalyst for the digital transformation.