Is easing lockdown in the US a good idea?
In my previous blog, I discussed how different age groups and genders are affected by the COVID 19 (link). Now let us see how the US stock market is impacted by the daily increase in COVID 19 cases and whether easing down lockdown will improve the US economy or not.
Since the first coronavirus case was confirmed in the United States on Jan. 21, over 1.5 million people have been affected by COVID-19 till now. On April 12, the U.S. became the nation with the most deaths globally and US stock markets witnessed one of their worst quarters. Since the growth of new cases and deaths plateaued the US government is planning to ease down lockdown restrictions to bring the economy back to normal.
The idea to ease down restrictions and open up business will be a huge risk to the US economy as this leads to the increase in more COVID 19 cases eventually leading to the collapse of the stock market again. An article published by SeekingAlpha states that lifting lockdown for short-term economic benefits probably causes much more risk to markets. And also an article published by BBC stated that coronavirus spread may destroy the economy.
With the strict lockdown in place, the trend of the daily infected COVID 19 cases seems to flatten a bit. But, easing down lockdown may cause the virus to spread faster and will lead to an increase in cases. Here is the graph showing the trend of daily new cases in the United States according to data published in the European Centre for Disease Prevention and Control website(link).
The Impact of COVID-19 on the stock market
On March 4th, 2020 the US government has announced lockdown in response to the novel coronavirus outbreak. But, as cases due to COVID 19 started to increase in February the percent of change stock market price plunged for both DowJones and Nasdaq. The stock market prices dipped in March when there was a huge rise in cases count due to COVID 19. On March 23rd both DowJones and Nasdaq recorded their lowest price, DowJones falling by 35% and Nasdaq falling by 26% when compared with its Feb 3rd price. With the decrease in the daily number of cases, both markets are showing some improvement in May. Here is the graph showing the daily trends of the percentage change in the stock market price for DowJones and Nasdaq.
As the recorded number of cases due to COVID 19 is very minimal in January, the percentage of change in stock value is considered starting from Feb 3rd. When correlation was performed individually for the increase in cases vs percentage change in stockmarket from Feb 3rd, the change in DowJones stock market prices showed an inverse correlation of 47% whereas Nasdaq showed an inverse correlation of 24%. This infers that with the increase in the daily number of cases stock value decreases. To further prove this point here is the polynomial regression model.
When the model is fitted taking the daily increase in the number of cases as an independent variable and both Dowjones and Nasdaq stock price percentage changes as dependent variables. The 9th order polynomial regression model showed a better fit with an adjusted R-squared value of 0.72. The P-value for the model is 3.57*10^-16 which is less than 0.05 so this infers results are statistically significant. It can be observed that the total curve is fitted below 0% stock value. Also, it can be seen from the curve that with the increase in cases the stock price is reducing.
The Impact of COVID 19 on Automobile Industry
Even the companies in the automobile industry showed a similar pattern as above. With the increase in COVID 19 cases count the stock price for both Ford and General Motors dipped. Both companies’ stock prices reduced by more than 50% in March and are slowly recovering with a decrease in cases due to COVID 19.
The percentage change in Ford stock market prices showed an inverse correlation of 72% whereas General Motors showed an inverse correlation of 67 %. The polynomial graph for combined percentage change stock prices of General Motors and Ford vs increase in cases is shown below.
Here for this data 7th-degree polynomial model seemed to be the best fit when fitted with a combined percentage change in the stock price of General Motors and Ford stock price with an adjusted R squared value of 0.86 and a P-value of 2.2*10^-16.
The Impact of COVID 19 on Digital Technology
With the lockdown in place and the increase in COVID 19 cases the stock price of digital technologies like Zoom, Netflix, and Amazon has increased. The Zoom stock priced almost doubled by May. Netflix and Amazon stock price increased by almost 20%.
Here when correlated with cases the percentage change in Zoom stock market prices showed a correlation of 74.6% whereas Netflix and Amazon have shown a correlation of 61% and 64% respectively. The polynomial graph for combined percentage change stock prices of Netflix, Amazon, and Zoom vs increase in cases is shown below.
The 8th order polynomial regression model showed a better fit when fitted by taking the daily increase in the number of cases as an independent variable and Amazon, Zoom, and Netflix stock price percentage changes as dependent variables with an adjusted R-squared value of 0.73%. The P-value for the model is 2.2*10^-16. Here it can be observed that the total curve is fitted above 0% stock value. Also, it can be seen from the curve that with the increase in cases the stock price is also increasing.
The Impact of COVID 19 on Oil
Even Oil Prices showed a similar trend to the Automobile industry. With the increases in COVID 19 cases, Oil prices started decreasing slowly in February and dipped in March. On April 22nd Oil price reached below 0 for the first time.
When correlated with the increase in cases the change in Oil prices showed an inverse correlation of 79%.
The outliners should be identified and removed before proceeding with the regression model. The outliner can be identified from fig 9. Here since only one value is negative this can impact the regression model. The polynomial model for the change in the oil price vs increase in cases can be seen below.
Here 7th-degree polynomial model seemed to be the best fit when fitted with an adjusted R squared value of 0.93 and a P-value of 2.2*10^-16.
Conclusion
It can be concluded that the US stock market prices are inversely correlated with the daily increase in cases. The US stock markets started to recover slowly with a lesser number of COVID 19 cases reported daily. If the lockdown is eased down it may lead to the spread of virus more and increase in COVID 19 cases which may eventually lead to the fall of stock market prices further.
Data
All the stock market price data is collected from Yahoo Finance which is reliable and data related to COVID 19 is collected from ECDC.
