Five Factors from COVID-19 Crisis Affect the Stock Market

CNBC reporter Bob Pisani identified five factors from the COVID-19 crisis that he said are affecting the stock market’s performance.

Five factors from COVID-19 that are impacting the stock market feature the delayed reopening of the U.S. economy, federal stimulus, the need for a vaccine, an ongoing trade war and the market’s valuation, Pisani said during a recent webinar sponsored by New York-based Fordham University’s Gabelli School of Business. The most important factor of them all likely is the development of a COVID-19 vaccine or treatment, he added.

Pisani Names Five Factors from COVID-19 Affecting the Market’s Performance

1. Reopening the U.S. economy after damaging lockdowns

Delays in reopening the U.S. economy by many governors around the country and a number of instances of new surges in the number of COVID-19 cases are holding back the market from a full recovery.

1. The need for continued stimulus from the federal government. 

The recovery depends on continuing stimulus from the federal government and easy-money Federal Reserve policies. 

1. The race for a vaccine or treatment to combat COVID-19 

A vaccine or treatment for COVID-19 is critical to develop as soon as possible.

1. The trade war 

The tensions that have ensued as a result of the virus have further strained an already-delicate trade relationship between the United States and China. The anticipation of a major blow up with the trade agreement between the U.S. and China is certainly influencing the market’s current performance, since commerce between the two countries plays an important role in the economic health of each of them.

1. Market valuation 

Is the market currently undervalued or overvalued? 

To What Extent is the Market Recovery Dependent Upon the Development of a Vaccine? 

Many commentators are speculating that the stock market’s rally is reliant upon the development of a COVID-19 vaccine, but Pisani explained that the market’s recovery is not contingent upon finding a vaccine for COVID-19. Rather, he said what is really needed are treatment modalities to restore a sense of normalcy in the market. 

His view is that we do not necessarily need a cure for the virus in the short term, but require ways to ameliorate the symptoms and to prevent so many people from succumbing to the virus. Pisani explained that if the negative impacts of the virus can be drastically reduced, the market can stabilize and advance.

How Have the Actions of the Federal Reserve Impacted the Market? 

The Federal Reserve has been an important source of stimulus and has adopted easy-money policies to keep interest rates and borrowing costs low. The help has totaled billions of dollars so far with a promise to do what is needed going forward.

Recent rebounds in the stock market largely are due to the actions of the Federal Reserve, Pisani said. He expressed support for the relief that has been provided so far and is optimistic that further help would be provided, if needed.

However, valid concerns remain about such major intervention coming from the Federal Reserve, Pisani said. Many people are skeptical that the relief that has occurred in the stock market is only temporary because massive inflation could be caused by the large stimulus package. Additionally, people are concerned that this kind of intervention can cause distortions such as creating zombie markets and/or zombie companies that are created by non-standard actions. Pisani did not rule out negative potential consequences, but he was confident that the Federal Reserve will continue to play a pivotal role in the recovery of the stock market.

Four Factors that Drive the Market in the Long Term, and How They are Performing Now 

Pisani finished his address by citing four different factors that he said hold the most influence about the market in the long term. These factors are always indicative of future stock market performance, not just during the global pandemic, he added.

  Below is a list of the four indicators and a brief analysis of how each one is currently performing, Pisani said.

1. Earnings

Are earnings growing or not in the broad sense of the market? Currently, earnings are not growing due to the strain of the pandemic. Earnings growth will need to be seen to produce a true market recovery.

1. Dividends 

Are dividends increasing or not? As of now, dividends are certainly not growing, and many dividend stocks are doing quite the opposite by suspending or cutting their dividend payments altogether. This action has become common among dividend-paying companies in an effort to reduce their financial burden. The trend of plummeting dividend payouts is a clear indication that the market is struggling as a whole.

1. The Price-to-Earnings (P/E) Market Multiple

Is the market multiple growing or not? Right now, the market multiple is actually increasing to signal optimism that earnings will go up eventually.

1. Liquidity

Is liquidity increasing or decreasing? Relative to the condition of the stock market in the past few months, liquidity has been growing as of recently. This positive shift is attributable to the Federal Reserve’s efforts to make money available.

While Pisani readily offered his views and applied his experiences to the current economic situation, he was sure to note that he cannot be entirely sure that his forecasts on the situation are correct. Pisani acknowledged that his predictions and his outlook may turn out to be wrong, and no one can be sure of anything right now due to the unprecedented circumstances of facing a global pandemic. 

The pandemic’s economic implications have created a very fluid situation that is rapidly changing, concluded Pisani, a correspondent for CNBC since 1990 who reported on a variety of topics before focusing on the New York Stock Exchange starting in 1997.

Olivia Faucher is an editorial intern who writes for www.stockinvestor.com.