The impacts of the coronavirus on the global economy: Part VIII: The stock markets

Some stock exchanges are recovering faster than others from the financial crisis caused by the outbreak of the coronavirus disease. On April 28, the NASDAQ composite index and the SIX Swiss exchange mid-cap index were respectively only 5.1 % and 7.3 % below their levels of January 6. On the other hand, the year-to-date return of the Brazil stock exchange index was -30.43 %. Those of the London Stock Exchange FTSE All Share, the Euronext N150, the Bombay Stock Exchange sensitive index, and the Australia Securities Exchange index were about -22 %.

Between January 6 and April 28, capital loss on the Hong Kong Stock Exchange went as low as -25.3 % (this value is the percentage change between the lowest and the highest values of the benchmark index). On the NASDAQ, the range of the capital los was 30.1 %, but this exchange is recovering faster than the Hong Kong Stock Exchange. Why capital loss has been more important on some stock exchanges than the others and why some exchanges have recovered faster than the others? There are two possible explanations. The first one is the sensitivity of the exchange to factors affecting the global economy (the systematic risk) and the second one is the structure or the composition of the exchange.

In the table below, it appears that the systematic risks on the New York Stock Exchange (NYSE) and the Brazil Stock Exchange (Bovespa) are very high during turbulent periods (actually, they are greater than 1). This means that these two exchanges are more exposed to global risk than the other major exchanges. This explains why the year-to-date returns of their benchmark indices are very low. The systematic risk on the Hong Kong Stock Exchange is only .55 and the year-to-date decrease in its benchmark index is less than those on the NYSE composite and the Bovespa index.

Table: Year-to-Date Returns on Apr 28, 2020 and Systematic Risk during Turbulent Periods of some Stock Exchanges.

Stock Exchange	Year-to-Date Return	Systematic Risk
NYSE	-18.81 %	1.11
NASDAQ	-5.11 %	1.11
Tokyo Stock Exchange	-14.80 %	.55
London Stock Exchange	-21.99 %	.83
Hong Kong Stock Exchange	-12.93 %	.51
Euronext	-21.79 %	.88
Toronto Stock Exchange	-13.49 %	.87
Bombay Stock Exchange	-21.05 %	.54
Frankfurt Stock Exchange	-17.76 %	.98
Australian Securities Exchange	-21.12 %	.59
SIX Swiss exchange	-7.28 %	.72
Brazil Stock Exchange BOVESPA,	-30.43 %	1.06

The systematic risk on the NYSE is the same as on the NASDAQ, but the latter exchange is recovering faster than the former. This means that the systematic risk is not the only factor explaining returns on the exchanges. The activity sector and the performance of the main companies in the benchmark indices also explain their year-to-date returns. Half of the companies in the NASDAQ composite operate in the technology sector and 11 % in the healthcare sector. As I show in my previous post [here], these are the two sectors that are performing better during this crisis. Likewise, more than half of the components of the Swiss exchange mid-cap index operate in the healthcare, the technology or the telecommunication sector.

On April 24 the global financial turbulence score rose from 4.38 to 4.62 (a 5.3 % rise). After keeping falling since March 20, The VIX (the implied volatility index) rose by 3.5 % to 37.19, on April 24.

Figure : Global Financial Turbulence Scores and VIX, Jan 8, 2000 - Apr 24, 2020

Dataset and Code

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The Latest Global Financial Turbulence Scores.

Date	Score
Feb 14, 2020	1.36
Feb 21, 2020	6.23
Feb 28, 2020	3.68
Mar 6, 2020	9.74
Mar 13, 2020	12.89
Mar 20, 2020	9.37
Mar 27, 2020	8.03
Apr 3, 2020	7.70
Apr 10, 2020	4.10
Apr 17, 2020	4.38
Apr 24, 2020	4.62

The components indices of the global financial turbulence score

(1) NYA: the New York Stock Exchange composite index, (2) IXIC: the NASDAQ composite, (3) N225, the Tokyo Stock Exchange average index, (4) FTAS, the London Stock Exchange FTSE all share, (5) HSI, the Hong Kong Stock Exchange index, (6) N150, the Euronext Next 150 index, (7) GSPTSE, the Toronto Stock Exchange composite index, (8) BSESN, the Bombay Stock Exchange sensitive index, (9) GDAXI, the Frankfurt Stock Exchange performance index, (10) AXJO, the Australian Securities Exchange S&P 200, (11) SSMI, the SIX Swiss exchange mid-cap index, and (12) IBOVESPA, the Brazil Stock Exchange index.

Formula

$$d_t² = (r_t - μ ) Σ ^-1 (r_t - μ )',

where $d$ denotes the turbulence score, the vector $r$_t lists the current growth rates of the benchmark indices, the vector $$ μ their historical averages, and $$ Σ designates their variance-covariance matrix. For further details, see Mark Kritzman and Li Yuanzhen (2010).

The impacts of the coronavirus on the global economy: Part VII The sectors of the stock markets

To what extend the outbreak of the coronavirus disease (the COVID-19) has affected investments in the various sectors of stock markets? To find this out, I have computed the year-to-date returns of two exchange-traded funds (ETF) that track the performance of the various sectors of the United States (US) and the global stock markets. The year-to-date return of a fund is the percentage change in its market value between the first trading day of the current year and the current date. The two ETFs that I am using to proxy the performance of the sectors of stock markets are: the select sector Standard and Poor's Depository Receipt (SPDR) funds and the iShares Standard and Poor's (S&P) global. The SPDR tracks the sectors within the S&P 500 (which consists of companies based in the US) and the iShares S&P global tracks the S&P global 1200 index (which consists of companies based in 31 countries).

Energy companies followed by the financial and the industrial companies turn out to be the three sectors that are most affected by the current crisis. In the US and the global markets, energy stocks lost respectively 41.6 % and 39.7 % of their values, between January 2 and April 27 (see the table below). This situation is explained by the dramatic drop in the price of the crude oil. As a matter of fact, over this time period, the spot price of a barrel of the West Texas Intermediate (WTI) crude oil fell from US$ 61.17 to $ 12.17 (which represents an 80.1 % decrease). The price of the Brent crude oil plunged from US$ 67.05 to $ 15.17 (which represents a 77.4 % decrease). On April 20, the WTI turned negative.

Table: Year-to-Date Returns of ETFs, Jan 2, 2020 - Apr 27, 2020.

Sector	Select Sector SPDR	iShares S&P Global
Consumer Discretionary	-9.90 %	-16.61 %
Consumer Staples	-5.76 %	-7.92 %
Energy	-41.61 %	-39.67 %
Financials	-27.67 %	-29.55 %
Health Care	-.54 %	.13 %
Industrials	-23.99 %	-24.05 %
Information Technology	-4.28 %	-5.48 %
Materials	-15.67 %	-18.18 %
Telecommunication Services	-4.45 %	-9.28 %
Utilities	-7.65 %	-9.54 %

The lockdown of economies and the layoffs that followed also considerably harmed the financial sector (personal, commercial, corporate and investment banking, transaction processing services, wealth management, …) and the industrial sector (manufacturers of capital goods, …) in the US and the other markets across the globe.

Health care (pharmaceuticals; health care providers, health care equipment and supplies, …) is the only sector that has recorded a capital gain, during this pandemic. The consumer staples, the information technology, and the telecommunication services are the three other sectors where investors incurred less losses. The reasons are that: (1) consumer staples (food, beverages, home and personal care, alcohol, and tobacco, …) are essential goods and services, (2) the services provided by information technology and telecommunication companies are ways of breaking isolation and loneliness during the lockdown. As an example, during the first quarter of this year, 15,8 million new people subscribed to the movie streaming services of Netflix.

Utilities, (gas, electricity and water distribution), which are known as a defensive sector, poorly performed, as many households waiting for employment insurance benefits had to postpone the payment of their bills.

The year-to-date returns of the select sector SPDR are similar to those obtained using such other major ETFs as the Vanguard and the Fidelity index funds that rather track the MSCI US index. Unlike stock markets, the year-to-date yields of bonds are positive. The year-to-date yield of the vanguard total bond market index fund is 3.92 % and that of the Fidelity total bond ETF is 2.03 %.

After plunging to 4.10 on April 10, the global financial turbulence score rose to 4.38 on April 17 (see the figure below). As I pointed out in my previous post [here], this means that the financial crisis caused by the outbreak of the coronavirus is not over yet. Unlike, the turbulence score, the VIX (the implied volatility index) keeps falling. It went down from 38.15 to 35.93, on April 17 (which represents a 5.8 % decrease). This means that despite the fact that volatility on stock markets starts rising again, investors are less pessimistic about the future.

Figure: Global Financial Turbulence Scores, Jan 8, 2000 - Apr 17, 2020.

Dataset and Code

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The Latest Global Financial Turbulence Scores.

Date	Score
Feb 14, 2020	1.36
Feb 21, 2020	6.23
Feb 28, 2020	3.68
Mar 6, 2020	9.74
Mar 13, 2020	12.89
Mar 20, 2020	9.37
Mar 27, 2020	8.03
Apr 3, 2020	7.70
Apr 10, 2020	4.10
Apr 17, 2020	4.38

The components indices of the global financial turbulence score

(1) NYA: the New York Stock Exchange composite index, (2) IXIC: the NASDAQ composite, (3) N225, the Tokyo Stock Exchange average index, (4) FTAS, the London Stock Exchange FTSE all share, (5) HSI, the Hong Kong Stock Exchange index, (6) N150, the Euronext Next 150 index, (7) GSPTSE, the Toronto Stock Exchange composite index, (8) BSESN, the Bombay Stock Exchange sensitive index, (9) GDAXI, the Frankfurt Stock Exchange performance index, (10) AXJO, the Australian Securities Exchange S&P 200, (11) SSMI, the SIX Swiss exchange mid-cap index, and (12) IBOVESPA, the Brazil Stock Exchange index.

Formula

$$d_t² = (r_t - μ ) Σ ^-1 (r_t - μ )',

where $d$ denotes the turbulence score, the vector $r$_t lists the current growth rates of the benchmark indices, the vector $$ μ their historical averages, and $$ Σ designates their variance-covariance matrix. For further details, see Mark Kritzman and Li Yuanzhen (2010).

Business Cycles and the Stock Market

In 2007, the commodity bubble contributed to the Great Recession. The information technology bubble, in the late 1990s, was followed by a recession. These observations bring this question: how do business cycles, i.e. alternating economic expansions and recessions, relate to fluctuations in the various sectors of stock market?

To answer for this question, I have analyzed monthly gross domestic product (GDP) in Canada and Standard & Poor's (S&P) indices of various sectors of Toronto Stock Exchange (TSX).

S&P/TSX Indices and GDP, Canada, 1998:M1-2015:M11

In Canada, an effect of the Great Recession was a continuous fall in GDP from Octobeer 2008 to May 2009. At the same time, over six consecutive months starting from September 2008, the stock market plunges. Stocks in the sector of diversified metal and mining lost 62.75% of their values. In the energy sector, they lost 51% of their values. In both the information technology and industrial sectors, the value of stocks plummetted by about 44%. Only the gold sector grew by 9.26%. The lost in the consumer staples sector was much lower (4.94%).

In Canada, a slow down followed the burst of the information technology bubble. Between August 2000 and September 2002, in the information technology and telecommunication service sectors, stocks lost respectively 90% and 56% of their values. Stocks were worth 30.6% less in the consumer discretionary sector. Sectors that outpoerformed were the gold (+85.6%), consumer staples (+65.2%), utilities (+39.9%), and energy (+33.6%).

The table below shows how the various sectors of the stock market fluctuate over the business cycle. Business cycle is measure as short-run fluctuations in GDP.

Cyclical Behavior of the Stock Market and GDP, Canada, 1998:1-2015:M11

Sector	% Standard Deviation	Correlation with GDP
S&P 60	9.84	.57
Consumer Discretionary	8.85	.44
Consumer Staples	5.95	-.08
Energy	12.63	.41
Financial	10.25	.25
Gold	12.91	-.05
Industrial	11.06	.48
Information Technology	21.84	.39
Material	11.45	.36
Diversified Metal Mining	21.65	.29
Telecommunication Service	12.08	.5
Utilities	8.07	.21
GDP	.87	1

• The stock market is procyclical, i.e. positively correlated with the business cycle, except the sectors of consumer staples and gold.
• The stock market is more volatile than the real economy.
• The most volatile sectors of the stock market are: the information technology and the diversified metal and mining.

In most sectors, the stock market leads the business cycle by three months.

The dataset used is available here

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