The Impact of the COVID-19 Pandemic on the U.S. Economy: Evidence from the Stock Market

Author Name Willem THORBECKE (Senior Fellow, RIETI)
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This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).

The COVID-19 pandemic has contributed to a rise in U.S. unemployment from 3.6 percent to 10.1 percent between January and July 2020 and a drop in industrial production of 9 percent. The Federal Reserve and the U.S. governments removed all stops to fight the economic downturn.

To investigate how the pandemic and the policy response have affected the U.S. economy this paper examines the response of stock returns across 125 sectors. As Black (1987, p. 113) observed, "The sector-by-sector behavior of stocks is useful in predicting sector-by-sector changes in output, profits, or investment. When stocks in a given sector go up, more often than not that sector will show a rise in sales, earnings, and outlays for plant and equipment." The paper also divides sectoral stock returns into the portion that can be explained by eight macroeconomic variables and the portion explained by sector-specific factors.

Figure 1 shows overall stock returns between 1 January and 10 July 2020. After increasing between January 1st and February 19th, prices fell logarithmically by 42 percent between February 19th and March 23rd. They then increased by 37 percent between March 23rd and July 10th. Researchers have found that news of the coronavirus contributed to the drop between February 19th and March 23rd and that news of expansionary policies by the Fed and the U.S. government contributed to the rebound between March 23rd and July 10th. This paper focuses on the response of stocks over the 19 February – 10 July period, but also considers the 19 February – 23 March and 23 March – 10 July periods separately.

Previous research by Chetty et al. (2020) employed daily data to examine how spending, revenues, employment, and other variables responded at the county and industry level. Since the fall in GDP between 2019Q4 and 2020Q1 was driven by a drop in personal consumption expenditures, they investigated consumer spending. They reported that more than half of the drop in spending in June 2020 relative to June 2019 came from the top income quartile and only five percent of the drop came from the bottom quartile. They found that three-fourths of the drop in spending between the pre-coronavirus period and the middle of April came from goods and services requiring close contact such as hotels, transportation, and restaurant meals. They also found that high-income households reduced spending at businesses producing non-tradables, causing these businesses to lay off low-income employees. Government stimulus payments then stimulated spending by low-income individuals but did little to increase employment among the many laid off from jobs requiring close contact. Government loans to small businesses to continue paying wages also did little to increase employment among these service workers. Chetty et al. concluded that stimulating aggregate demand and providing liquidity to businesses may not increase employment much when spending is constrained by health concerns.

The results from the sectoral stock return regressions over the February 19th – July 10th period indicate that there are large swaths of the U.S. economy that performed poorly not because of the macroeconomic environment but because of idiosyncratic responses during the crisis. These sectors include airlines, aerospace, real estate investment trusts, recreational services, brewers, apparel retailers, and funerals. Their ability to recover depends on the pandemic being brought under control. On the other hand, many sectors that are important for capital investment such as production equipment, machinery, and electronic and electric equipment are dependent on the macroeconomy. A robust economic recovery is thus necessary to revive business investment.

There are also some sectors that did well during the 19 February – 10 July 2020 period sample period. Their gains were not driven by the macroeconomic environment but by sector-specific characteristics. These sectors included electronic entertainment, diversified retailers, nondurable household goods makers, biotechnology companies, and computer hardware, and software firms. Electronic entertainment includes video games, and spending on this has soared as people are homebound. Diversified retailers include companies such as Amazon that have become a crucial lifeline for individuals stuck at home. Nondurable household goods included Clorox, whose wipes have become essential for disinfecting. Biotechnology firms have done well as investors bet on their ability to develop a cure for the virus. Computer hardware has profited as people at home spend more time on computers and purchase new equipment. Computer software has gained as platforms such as Zoom have become essential to people transitioning from in-person to virtual meetings.

As discussed above, expansionary policies by the Federal Reserve and the U.S. government contributed to a 37 percent increase in stock prices between 23 March and 10 July 2020. During the recovery period, seven of the 13 best performing sectors were related to the home and home improvement. As people sheltered at home, they spent on their homes. While this will make houses more comfortable, evidence reported in the paper that the real estate sector has done badly indicates that this spending might not yield a high return on investment (ROI).

Expansionary policies that raise spending but do not lead to a high ROI will produce short run gains. Chetty et al. (2020) reported that stimulating aggregate demand and providing liquidity to businesses may not increase employment much when spending is constrained by health concerns. U.S. policymakers thus need to develop a new playbook to promote sustainable recovery from the COVID-19-induced downturn.

Figure 1. U.S. Aggregate Stock Prices
Figure 1. U.S. Aggregate Stock Prices
Source: Datastream database.
  • Black, F. (1987). Business Cycles and Equilibrium, Basil Blackwell, New York.
  • Chetty, R., Friedman, J., Hendren, N., Stepner, M., and the Opportunity Insights Team. (2020).
    How Did Covid-19 and Stabilization Policies Affect Spending and Employment? A New Real Time Economic Tracker Based on Private Sector Data. Opportunity Insights Working Paper (available at: