Insights / Research BriefMar 27, 2020

The Unprecedented Stock Market Reaction to COVID-19

Current US stock market volatility is by far the highest disease-related reaction since 1900, with news about COVID-19, including policy responses, the likely driver.

As the novel coronavirus (COVID-19) spread around the world, equities plummeted and market volatility rocketed upwards. In the United States, recent volatility levels rival or surpass those last seen in October 1987 and December 2008 and during the Great Depression, raising two key questions: 1) what is the role of COVID-19 developments in driving market volatility, and 2) how does this episode compare with historical pandemics, including the devastating Spanish Flu of 1918-20?

Employing automated and human readings of newspaper articles dating to 1985, the authors find no other infectious disease outbreak that had more than a minimal effect on US stock market volatility. Reviewing newspapers back to 1900, the authors find no contemporary newspaper account that attributes a large daily market move to pandemic-related developments, including the devastating Spanish Flu pandemic, which killed an estimated 2% of the world’s population. In striking contrast, news related to COVID-19 developments is overwhelmingly the dominant driver of large daily US stock market moves since February 24, 2020.

While the severity of COVID-19 explains some of the market’s volatile response, the authors find this answer incomplete, especially since similar—or worse—fatality rates 100 years ago had comparatively modest effects on markets. The authors offer three additional explanations:

  • Information about pandemics is richer and is relayed much more rapidly today.
  • The modern economy is more interconnected, including the commonplace nature of long-distance travel, geographically expansive supply chains, and the ubiquity of just-in-time inventory systems that are highly vulnerable to supply disruptions
  • And behavioral and policy reactions meant to contain spread of the novel coronavirus, including adoption of social distancing, are more widespread and extensive than past efforts, and have a more potent effect on the economy.