COVID’s evolving impact on financial markets
And what of COVID’s effect on financial markets and the broader economy? Economic expectations since the start of the pandemic have been a two-horizon scenario.
The first horizon, which has been in place since the middle of 2020, represents reopening activity around the globe as society adjusts to life with COVID-19 as a lingering concern.
The second horizon is when the markets achieve a “steady state” that more closely resembles conditions in pre-pandemic times. Investors may be anxious to see the economy reach that second horizon, but while U.S. and European economies have shown signs of recovery, China is still experiencing the pandemic’s global economic impact, says Haworth.
“China is more like the U.S. was in 2021,” he says. “It’s researching some form of mRNA vaccine, which could help manage infection risks as they reopen, and that's probably the biggest story as we look at 2023 in terms of the change in economic growth.”
Haworth predicts China will experience pent-up demand in travel and goods. “Their lockdowns have been more severe,” he says. “Their citizens have been kept away from being able to go out and travel and other things.”
However, China’s economic growth will likely be slow. The country experienced GDP growth of just 2.9% in the fourth quarter of 2022, which is low by historical measures.1 Fourth-quarter growth for China in 2020, for example, was 6.5%.1
Financial market trends since COVID
While the stock market enjoyed a solid recovery in 2021 as most of the world started to reopen, optimism started to slide in 2022 due to inflation, the war in Ukraine, U.S. political tensions and the global impact of China’s pandemic response. Wall Street experienced its worst year since 2008’s Great Recession.1 The S&P 500 index fell 19.4%, and the Down Jones Industrial Average fell 8.9%. Tech stocks were some of the worst performers, down between 22% and 66%.2
COVID’s impact on the stock market in 2023, however, is much less severe than earlier in the pandemic, says Haworth. “The market is paying much less attention to the ebb and flow of infections,” he says. “The market is trying to anticipate what will happen next in China as they reopen, while the rest of the world is closer to normal—perhaps a next normal.”