KAMPALA – It is said that “when the President of a country sneezes, the STOCK EXCHANGE catches cold”. This is an old age expression within the finance community. The stock exchange is part of the financial markets and is the market for long term finance. Every activity in an economy is finally expressed in terms of money. The COVID 19 crisis that is ravaging the world will at the end of the day be expressed in terms of how much money the country has spent or lost in various activities and incidents. Because of this, money, also expressed as finance is extremely important in an economy. Money should be an expression of what people produce in an economy. Money is demanded for purposes of under taking economic activities among others and it has a cost, that cost is the famous “interest rate”. This is not for discussion in this article.
The financial markets include both the money market and capital market, the money market is where money and financial instruments are sold and bought by various players for various purposes. It is a short-term market. The capital market is a market for shares and other securities mainly long-term finance and it normally includes the stock exchange which is a physical market and the “financial market” which is a group of organizations that deal in buying and selling of shares and securities for long term purposes. These include development banks and other financial institutions that take a long-term view of the market.
The stock exchange is where companies that seek investment money from the general public are listed and where the shares of those companies are bought and sold. The state of the financial market in a country generally indicates the state and temple of development of an economy. In a pure capitalist system, financial markets are a very key component of the economy. These markets have players who buy and sell the various instruments in them. These include commercial banks and other financial institutions and the central bank of a country is the apex institution in such a market. In a free market economy buying and selling depends on a variety of factors, the economic conditions, political conditions, social conditions, technological conditions and any other major factor in the economy. These shape demand and supply. The Coronavirus is a such a factor. It is today a key determinant of market movements. The buying and selling of shares is a psychological decision based on how the buyers and sellers feel about the market.
The Coronavirus is a global health pandemic which has led to various actions and decisions by politicians, policy makers, businessmen and ordinary people. The major issues are shutdown of economies, quarantines people falling sick and being treated. There is also fear and panic among people. Shutting down businesses means stopping of economic activity, this means stopping production of goods, stopping transportation and largely a standstill in economic activity! Complete lock down may be suicidal especially, interestingly in developed countries!
These actions and decisions are usually business influencers. But the virus is a unique thing. How it spreads and what causes it. Worse still the virus has led to death of thousands of people. That is how serious the Coronavirus is. Some of these decisions are made by politicians like the President, others are made by the business people themselves, others are made by individuals. For those who are buying and selling financial instruments and ordinarily do it for financial gain, they will want to sell what they have before the prices go down. Price always plummet if there is a problem. This is when there is a run on the market. A crush. The need to sell increases supply of instruments and prices plummet.
Markets crush when prices of shares and other instruments drop.
The New York stock exchange has been the world’s leading financial market for more than a century. It has crushed several times. A market crush is when a market loses 10% or more of its value in a single day. There have been several such crushes. The New York stock exchange is located on Wall street in New York and it is named after that street. The index that shows the collective volume of the shares on the New York stock exchange is known as the Dow Jones index.
Interestingly the first global impact market crush was in 1637 in the Dutch market and it was over tulips. The Dutch hyped tulips and made them over valued. In the US the first crush on the New York stock exchange was in 1926. The next big crush was in 1987. In 2007 the leading markets again crushed starting from New York over the housing crisis. The Coronavirus has been the next source of market crush. In the month of March, the markets have dropped by over 20%. Market crushes lead to economic crisis.
Normally a depression, low production and misery among people. But a crush coupled with a lock down, fear, panic and death is different.
An Economic crisis is when all these decisions are taken by various parties lead to failure of companies and economic hardships.
Some decisions are in a panic mode especially those of the business community. Those by government are in a thoughtful mode keeping in mind all factors. What does government do to ensure that it balances all these factors and continues to create stability in the economic system. This is not easy and, in such moments, government has the biggest task.
Announcements by government influence markets but the markets usually don’t care what government says. They listen but still take their best felt direction. Unless if government act to stop loss by investors.
Markets depend on collective psychological feeling of the investors. If markets care what government says and are sympathetic to government, investors will lose money! But it is only government that can restore economic sanity.
Irrespective of ideology, government must come in to offer stimulus to the economy. Public investments are usually, the main areas. But in times of economic misery, government may create jobs and also provide unemployment benefits including food. But only if they are prepared or can afford it.
The onset of the Coronavirus led to the collapse of financial markets in the developed countries. In recent history the biggest crush as earlier stated was in market was in 1986. There have been other market crushes as stated but the most recent significant one was during the housing crisis of 2007 – 2009. These crushes were sparked off by dysfunctional incidents primarily in the developed countries.
Today it is the Coronavirus. Natural disasters like Earth Quakes, Tsunamis, and Storms are known to occur periodically in certain areas. They create sudden changes and impacts in the markets but managing their post mortem is easy. You asses the damage and react accordingly. But the Coronavirus could not have been predicated and the way it is developing is unknown therefore causes more uncertainty in market and more volatility. Not surprising markets have crushed by over 20%. It is ravaging economies and markets in its wake. This is beside simply killing people! But Satyajit Das, said to be one of the world’s 50 most influential financial figures says, the markets were due for a correction crush. He says, the pandemic simply exposed an unsound final system. The US economy is highly indebted the economic stimulus package may add to the problem. Making the US more economically unstable.
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Juma Waswa Balunywa, is a scholar in management, leadership and entrepreneurship. He is also an academic administrator, who serves as the Principal of Makerere University Business School, a public institution of higher education in Uganda.
