It all began when a cluster of cases of pneumonia of an unknown cause was reported in the city of Wuhan, China. With this, a previously unknown virus named the COVID-19, as recognised by the World Health Organisation, shook the world. The virus spread like wildfire throughout and put everything on hold, changing the outlook of the entire world. The disease not only turned out to be a global pandemic but has also affected the economies of each country. Most of the countries were forced to initiate a lockdown to control the spread of this deadly virus. As a result, this lockdown impacted every sector, demand and supply chains were disrupted thereby significantly impacting the global economies. Even after the lockdown ended, economies continue to suffer because the social distancing guidelines affect the productivity of companies and industries, leading to a decrease in revenue, all when the operating costs remain the same. Companies’ operations and workings came to a halt; layoffs and employee’s compensation were affected; fixed costs added to the burden resulting in negligible growth.
Financial markets were not an exception. The crash began in mid-February 2020 however it intensified in March to a greater extent. The global stock markets witnessed a massive crash of 12-13% on 16th March which was labelled as a ‘Black Monday’. Apart from 16th March, 9th March and 12th March have also become historical dates in the global stock market as both these dates witnessed a huge crash. Both these dates have been labelled as’ Black Monday 1’ and ‘Black Thursday’ respectively due to the significant impact these dates had on the global markets. On March 11, the Dow closed at 23,553.22, down 20.3% from the 12th Feb high. With this, the markets witnessed the start of the bear phase which ended with an 11-year-old bullish phase. By March 23, 2020, the S&P 500 Index fell 34% to a low of 2,237.40. Some even claimed that this pandemic is more hazardous than the Global Crisis of 2007-08. The investors’ risk increased substantially and everyone had to face losses.
Following the global trends, the Indian Government also imposed a nationwide “Janta Curfew” on 22nd March in response to the spread of this deadly virus. As a result, all the economic and financial activities were disrupted which also influenced the Indian stock market. The effect that COVID-19 had on the Indian stock market could be easily witnessed through the two major Indian stock exchanges i.e., Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Sensex dropped by 13.2% on 23rd March 2020 which is the highest single-day drop after the Harshad Mehta scam (1991). Similarly NIFTY dropped by approximately 29% during the same time. Ironically just two months prior i.e., in January both NSE and BSE were hitting their highest levels and peaked at 12362 and 42273 points respectively with favourable results. A “Black Swan Event”, an event that is rare and unpredictable and is beyond expectations and certainly has extreme consequences was witnessed in the Indian Stock Market due to COVID-19. The lockdown policy and its effects led to uncertainty among the investors thereby leading to a demand-side shock. The number of investors willing to buy the stocks reduced and everyone wished to sell, leading to greater supply and eventually a fall in prices. Studies reveal that previous pandemics affected the demand side but the COVID-19 pandemic certainly had no boundaries and it even disrupted the supply chains to some extent. Sectors such as aviation, hospitality, leisure and entertainment were among the most adversely affected and the stocks of such companies declined by more than 40%.
The time plot graph of BSE and NSE stock prices has been examined over the time period of June 2019 to April 2021. It can be clearly observed that before February 2020 (pre-covid period) the prices of both the indices were reacting positively, showing a smooth curve. However, the immediate effects of COVID-19 can be observed through the graphs. Both the indices move down to the bottom of the graph (steep) by end of March 2020 and the start of April 2020, which clearly indicates a major stock market crash. However, we could see a recovery post-April 2020 as the lockdown was lifted and relaxation was provided by the Indian Government leading to things going back to normal. Though we see minimal declines in the BSE and NSE share prices in October 2020 as well as April 2021, such declines are minor and less frequent, so they don’t have a major impact on stock markets.
BSE STOCK PRICES TIME GRAPH
NSE STOCK PRICES TIME GRAPH
Source-Money Control
A statistical analysis using the daily prices and returns of BSE and NSE for the time period of COVID-19 (from February 2020) as well as pre-covid (before February 2020) has been exhibited in Tables 1 and 2. Mean return is one of the major indicators of profit in the stock market and table 1 clearly indicates that the mean is negative which signifies negative returns in the stock market. Negative skewness and high kurtosis indicate chances of high risks and losses which can be seen in both the NSE as well as the BSE.
Table 2 clearly signifies the mean returns were positive during pre-covid times and negative in covid times which pose a huge threat and risk to the investors. Higher the standard deviation higher is the volatility in prices, which can be seen in Table 2, when compared between pandemic and pre-pandemic times. This indicates the kind of impact COVID-19 had on our stock market.
TABLE 1
TABLE 2
Source-Research Square
But history indicates that such volatility and crash in the stock market is temporary because none of the crises lasts for long. In fact, if seen from a different point of view this drop provides investors with an opportunity to enter into the stock market and earn higher returns, at least in the long term. It is recommended that investors should use the market fall to rebalance their portfolios and avoid excessive leveraging at such times. No one can predict the exact outcome COVID-19 would have on the economy and markets but one thing is for sure that the economy and stock markets would definitely bounce back. The stock market even bounced back post-April 2020 and it has been performing positively since then.
However, earlier this year, India was hit by the second wave of the COVID-19 which proved to be far more deadly and life-threatening. Since none can predict the future, we might even face another stock market crash in 2021. But some say that a crash like last year is highly unlikely and won’t happen again. In one of the interviews, Abhinav Angirish, the founder of Investonline said that he believes the return of COVID-19 will not lead to a correction in equity markets by more than 10-15%. He further claimed that the market has already witnessed the worst in 2020 and the coming quarters will see improvement and growth. The 2020 fall was no less than a knee jerk reaction but lately, things are coming back to normal, manufacturing and industrial activities gained pace and so did the IT industry. Even the economic and fiscal indicators signify buoyancy thereby giving hope and indicating the worst has passed. It would be interesting to witness whether we experience another stock market crash or not. By growing from 561 points in 1983 to even crossing 50000 points in 2021 (with a CAGR of 15%) and from 899 points in 1999 to approximately 15000 points in 2021, both SENSEX and NIFTY respectively have proved that such crashes are temporary and growth is permanent. So, there is no denial in the fact that even if a crash happens again in 2021 due to the other waves of COVID-19, it would be temporary and it will eventually be overcome.
By Aarushi Doomra