Marius Zoican PRO
I am an Associate Professor of Finance and Canada Research Chair in Financial Technology at the University of Calgary’s Haskayne School of Business. My research sits at the intersection of technology and finance.
Is this time different?
Markets in the age of the pandemic
Prof. Marius Zoican
A "flash" bear market
Source: Wall Street Journal
Nasdaq up 30% since January
| Index | Jan-Mar 2020 | Jan-Oct 2020 |
|---|---|---|
| S&P 500 | -30.69% | +7.77% |
| Nasdaq 100 | -20.05% | +30.54% |
What happened in 2008-10?
- At its bottom, S&P 500 was 55% from previous high.
- Slow recovery: 5 years to get back at Jan. 2008 levels.
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A tale of two crises
The Global Financial Crisis of 2008-2010
- Originates in financial sector spillover to real economy.
- Fundamentally, a problem of systemic over-leveraging:
- households borrowing above their means (NINJA loans)
- banks funding switched from long-term deposits to fragile short-term overnight loans ("Repo")
- Also, under-regulation:
- regulators underestimated systemic risk and how inter-connected the modern financial system is.
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A tale of two crises
The pandemic crisis of 2020-?
- Fundamentally, a real economy shock.
- Economic activity is disrupted:
- massive unemployment
- frozen economic sectors (think of airlines, hotels, AirBnB)
- economic opportunities for tech-savvy companies that can scale.
Spillover to financial sector? Looks like it!
Source: NYU V-Lab
Systemic risk at its
highest since GFC
Crisis probability at its highest since GFC
Spillover to financial sector? Looks like it!
Same picture for 🇨🇦:
- Non-performing loans
- Loan payment deferments
- Cheap government money
Quantitative Easing on steroids
U.S. Federal Reserve established two corporate credit facilities:
- May lend directly to corporations (Primary Market)
- May buy corporate bonds & bond ETFs (Secondary Market)
- The Fed also relaxed regulatory requirements for banks
- ... and dropped the reference rate from 1.75% to 0.25%
Do we read too much into the market recovery?
Somebody seems to!
What is the market?
The Great Disconnect
Top 5 companies (Apple, Amazon, Microsoft, Alphabet and Facebook) make up for 23% of the S&P 500.
58%
75%
26 %
10%
34%
"The stock market is comprised of the biggest and strongest companies. It is not representative of the entire economy. If there were a stock market index of private, small businesses, it would likely be down 50% or more."
-- William Ackman , founder of Pershing Square Capital Management LP
- Growth stocks (high P/E) react less to business cycles.
- Value stocks (low P/E) are more sensitive to overall economy.
- HML underperformance: Investors seem to be less confident in a fast recovery.
Source: Bank of Canada
What do markets really think of the economy?
Just looking at the index doesn't cut it anymore
Who is the market?
(and the brave post-pandemic world)
Retail trading surges in 2020
The Wild West of Retail Trading
Discount brokerages now offer fractional shares: own $0.01-worth of Amazon, or 0.000003 shares.
No trading commissions! 😊
Wait...how do brokers make money?
Discount brokers sell retail order flow to wholesale market-makers like Citadel.
(PFOF)
Going too far?
The curious case of the Hertz bankruptcy
Car rental business Hertz filed for bankruptcy in May, 2020
SEC eventually blocked the deal:
Then, something wild happened:
#WFH financial market?
(totally feasible!*)
* with some caveats!
Trading hubs make surveillance easier!
The human touch: NYSE and corporate success
Need for space: One market did not slow down
Source: TRREB September 2020 Statistics
#WFH
Thank you & stay safe!
Financial Markets in the Age of COVID-19
By Marius Zoican
Financial Markets in the Age of COVID-19
Presentation for the UTM Undergraduate Economics Council (October 14, 2020)
