Stock markets, economy and regulation

Douglas J. Elliott, partner at Oliver Wyman in New York, an expert in financial regulation and public policy, explains why, counterintuitively, the stock markets in the United States and in other geographies have drop less than expected based on the intensity of the covid 19 crisis.

The article shows “why a modest share price decline can be consistent with a terrible shorter-term economic shock”. According to him there would be several factors supporting the stock market prices evolution:

• Investment decisions are based on long term scenarios not just on the poor economic figures expected in 2020 and 2021.
• Equities are more attractive when interest rates are as low as they are now.
• Listed companies are larger and more resilient than SMEs, which in this crisis will be hit harder.
• Investors think that governments and central banks will not let stock markets fall strongly.

According to Douglas J. Elliott, “policymakers should be careful not to overreact to stock market movements”, in this regard the author comments that “ it would have been a mistake to treat the recent return of US share prices to near peak levels as a signal that no further policy actions would be needed to deal with the very harsh reality of the Coronavirus”