How COVID-19 Affected the Financial Markets

Updated Feb 09 2021

How COVID-19 Affected the Financial Markets

COVID-19 (Coronavirus) has disrupted the global economy in ways we never even thought possible. Hundreds of thousands of people lost jobs, others made more money than ever and the stock market made a huge drop with a massive recovery.

Covid-19 Illustrated

From the outside perspective of a normal person, this doesn’t make any sense at all, but for a trader, all the dots are connected.

The purpose of this post is to walk you through a few of the things that happened from a trading perspective and how you can take advantage if they happen again in the future.

If you’re a trader, you probably think like this, but if you’re not this is how I want you to learn how to think:

When the world goes through a disgraceful event such as COVID, terrorist attacks or anything else you can think of, there are lots of trading opportunities and that’s all you need to care about.

Before it even became a thing - December 2019 to January 2020

I remember back in January 2020 the article I read on the main page of Bloomberg about the Chinese Lunar New Year.

The article said that more than 3 billion people would move all over the world for this and they called it the largest human migration in history.

For those of you that don’t know me personally, let me say it like this: I am a paranoid person. Paranoia is what kept me alive all these years, a never-ending feeling of stress about the future, the need to prepare always for the worst while expecting the best.

You don’t get very far in life if you’re born in Venezuela and you don’t learn to be overcautious.

Back to the subject, when I read the headline, the first thought that came into my head is:

Think about it, if you ever played that game called “Plague” for IOS or Android where your objective is to kill the world with a virus, you always deploy first in China, it’s the perfect place to start a pandemic.

Regardless of this being something impossible to prove, for me, COVID-19 will always be remembered as a Bio Weapon, the start date combined with the largest human migration in history can't be a coincidence.

During this period, very little news were released. It wasn’t until the end of January and February when the media kicked off and the panic started.

How does COVID-19 affect businesses?

Between February and March the whole world became consumed by panic. Lockdowns started, businesses shut down their doors and the nightmare became official.

Some countries stayed on really long lockdowns, others reopened in the summer while hiding their COVID numbers to make some money from tourism in order to go into lockdown again after the summer season.

In order for businesses to make money, they need a few things:

And leave aside for a second whether the business is good or not, competitors, etc. We’re talking about the most basic business requirements right now.

Before we begin with a clear explanation, the most important thing we need you to understand is that everything is connected, if a part of the chain fails, we all fail. Look at the image below:

Industries connected

Look at all the different people involved in oil:

What happens when one of them fails? It has an effect on all of them, and this is something you can see in our COVID trail of events. 

Let’s look at how closing down all restaurants affected the whole economy:

You get the picture right? It's dominoes. A never-ending chain reaction.

Now, why do we care? Asides how it affects us personally it also affects each one of the companies being traded on the stock market.

If these companies are not making money, investors dump their stocks, prices of shares go down.

See where we’re going?

Trading opportunity - The S&P500 and COVID-19

Instead of focusing ourselves on individual businesses, let’s talk big.

The S&P500 is the largest index in the U.S stock market accounting for almost 80% of the stock market’s value.

It’s an average measure of the largest 500 publicly traded companies in the U.S.

When you want to take a look at the U.S economy’s health, taking a look at the S&P500 is a good start, so here we go:

S&P500 Price in 2020

You might be wondering, how come if on February we were barely starting lockdowns the S&P500 was crashing already?

Because traders make money by anticipating things, not by jumping on them after they happened.

And why did they anticipate this? Well, because they knew the chain reaction that the virus could trigger, they understood how businesses operate and how this could harm them.

Now you know, during crisis times you have the opportunity to bet in favour or against certain assets such as stocks or indices, all you need to do is understand if what’s happening to them right now is positive or not.

Trading opportunity - The VIX and COVID-19

The second trading opportunity I’d like to show you is the VIX (Chicago Board Options Exchange's CBOE Volatility Index).

The VIX is an asset designed to measure the stock’s market expected volatility and it does so by basing itself on the S&P500 options. This post is not a detailed guide on the VIX, S&P500 or options, so we’re not gonna go into too much details about the financial instruments themselves or how to calculate them, what you really care about is:

Think of the VIX as the volatility measure, the financial chaos tracker.

Here’s a chart of the VIX (notice how in March 2020 we got close to the same levels of October 2008 when the financial crisis happened).

Vix Index price 20 years

If we look at the VIX during the year 2020, you can see exactly when the climb started:

VIX index price 2020

To make things even more interesting, go back and look at the S&P500 for the year 2020. Notice how when the S&P500 began its fall, the VIX began to climb. That’s why traders use the VIX as insurance in case the S&P500 blows up. 

Now you know that there’s this financial instrument called the VIX which you can play with during uncertainty and crisis times.

What happened after?

Even though the stock market took a massive hit, somehow it recovered and reached all time highs.

If you understand how stock prices are determined, you can be sure of something:

If we all wake up tomorrow and decide to buy AAPL shares with all our life savings, the prices will shoot up.

The market crash we experienced combined with trading apps that allowed a lot of newbies with lots of cash and no knowledge of trading, resulted in a distorted reality.

Everyone saw stocks cheap and just went nuts and started a never-ending buying streak, regardless if it made sense to buy or not.

Digital businesses thrived, pharmaceuticals, companies like Amazon, Apple, all of that is understandable, but still, that rush is not to last if the world goes into a dark era where everyone is out of jobs and no one can afford anything.

At this point is very unclear what will happen next, here’s my guess:

Until we’re not fully able to restart the world’s engine and operate at full capacity, we are in very uncertain times.

Don’t bother if you see the S&P500 rising to the sky, wait for everyone to be vaccinated and the war to be over in order to celebrate.

The stock market can produce a distorted vision of reality due to the fact that it doesn't matter how much something is really worth but rather how much people think its worth. 

Conclusion

There are hundreds of opportunities during crisis times:

For this all you need to do is have a business mind, every day some business opportunity is born in the most stupid way possible you can imagine, here’s an example:

I hope this example made everything clear. There are a lot of opportunities out there, all we need to do is listen and analyse.

Good luck and stay healthy.

Author

Stefano Treviso

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