How Crises in the United States Impact the Stock Market

Intro

The topic for this paper was inspired by the Coronavirus pandemic, which has sent shock waves across the United States and much of the world. As the country panicked in many different ways, the stock market crash and looming recession were major areas of concern. The research and literature reviewed in this paper consist of findings related to the Coronavirus but is also extended to other moments of crisis in the nation’s history. This includes the September 11th attacks of 2001, various earthquakes and hurricanes, and an exploration of stock market trends that are prevalent within these events. The market reaction certainly varies depending on the specifics of the event. For example, 9/11 occurred in New York City but had severe economic impacts that permeated throughout the whole nation, while natural disasters are often seen as more local issues but can still result in stock market impacts as well.

Abstract

The main point of this paper is to review a multitude of peer-reviewed sources and journals to develop a better understanding of how crises in the US impact the stock market throughout history. There will be different subsections within the paper, as it is a complex topic with many different layers of research related to it. How much does the stock market change depending on the specific crisis that has occurred? Are there trends that are seen across all of these crises? These are a few questions that have guided the research conducted, and have been very interesting to look more in-depth on. Many of the sources give a lot of historical context around these events, providing important details about the economic state of the United States during each time period. The events discussed in this paper go in chronological order, by first looking at the September 11th attacks, followed by natural disasters like Hurricane Harvey & Katrina, and lastly the coronavirus pandemic of 2020.

The Stock Market’s Relationship with the Economy

Before looking into specific crises and their impact on the stock market, it is important to understand why the stock market plays an important role in the overall economy. While the stock market and the economy are separate entities, they do have a close relationship with each other. The stock market is a great way that public companies can raise capital to expand, hire more people, and continue to innovate. On the other side, people invest in companies to build their own capital, as they invest with the expectation of generating a good return. This can be a mutually beneficial relationship between companies and investors, as both can make themselves better off through investment activity.

Arora and Buza have an interesting perspective on the matter, detailing instances where the stock market and economy have seemingly gone hand-in-hand. For example, there was c clear relationship between the two that occurred back during the Great Depression, as the stock market crash resulted in a decline in consumer confidence, which had an overall negative effect on the economy of the whole country (Arora & Buza, 2011). Moving to more recent history, the stock market and economy saw similar fortunes during the 1990s, as times of high employment and low inflation were accompanied by stock market returns averaging more than ten percent (Arora & Buza, 2011). However, the stock market and the economy do not always move in perfect unison. This can often be a difficult concept to grasp, especially during the Coronavirus pandemic. The S&P 500 index has hit its all-time high during this pandemic back in July, yet unemployment in the US has remained sky-high throughout COVID19. While there is still a relationship between the stock market and the economy, the two do not always go hand-in-hand. This paper analyzes why the market reacts in certain ways during times of crisis by going through various research and literature that helps explain the issue. This is very much not a black-and-white issue, as so many different factors can impact the stock market both for better and for worse.

The Stock Market reaction after 9/11

The first crisis examined here is the September 11th attacks that took place in New York City in 2001. This was a moment that sent shock waves across the country, with a total of 2,977 people being killed. The stock market experienced turmoil as well, with The New York Stock Exchange (NYSE) and the NASDAQ both being closed as a result of these attacks (Carter & Simkins, 2004). Trading resumed on September 17th following the week-long close, but there were still major implications on the stock market when the markets opened back up. Even as the markets reopened, there was a lot of panic selling that occurred, as the country was in a moment of panic altogether (Carter & Simkins, 2004). A key reason why these attacks were so detrimental to the stock market and caused a 6-day shutdown was in large part due to location, as they took place in a major business sector for the United States in New York City. The World Trade Center was located right in the heart of the New York City Financial District, a major hub for stocks and trading (Carter & Simkins, 2004). This amplified the immense stock market decline, as the overall market went down seven percent once it reopened on September 17th (Carter & Simkins, 2004).

One sector that was hit particularly hard following 9/11 was the airline industry, such as American and United, as well as a handful of other airlines that are publicly traded. The industry as a whole did not generate revenue for four straight days, with this halt having a direct cost of $1.32 billion (Carter & Simkins, 2004). However, even when the airlines reopened again, the impacts of 9/11 were still significant in the following months, with losses through December of 2021 coming out to roughly $10.13 billion (Carter & Simkins, 2004). Based on the research done by Carter and Simkins, it is important to note that certain airlines were impacted more than others. A general trend that was found saw airlines with more international flights having their stock values drop more sharply. But, generally speaking, U.S airlines struggled much more heavily during this time than international airlines overall (Carter & Simkins, 2004). With such an outsized economic impact being felt by so many, there was a great demand for Congress to take action and provide relief to those in need. One form of assistance that was enacted in order to help the airlines during this emergency was by providing $15 Billion worth of support through the Air Transportation and System Stabilization Act (Carter & Simkins, 2004). However, the employees in these types of companies were not necessarily helped by this, as unemployment skyrocketed especially in this sector of the economy following 9/11 (Weller & Scott, 2001). The United States was also in a weak economic state prior to these attacks. Following this horrific event, a recession was inevitable, with a variety of factors of the economy being hit hard, including stock values rapidly declining (Weller & Scott, 2001). An economy that was already struggling was put in a much worse position following these attacks.

From a regulatory standpoint, there were major implications to stocks dropping in value as a result of 9/11. Investment banks and institutional investors have a lot at stake, so a major drop in stock values will in turn generate a lot more risk for these types of companies (Straetmans & Verschoor, 2008). Investment banks and institutions have much diversity in their portfolios, but with so many sectors being impacted by this crisis, there were still major implications for their businesses as well. The long-lasting impacts of 9/11 still do have effects on the stock market, as the risk of terrorism became a real threat in the United States, which was not the case before the attacks. People and Groups such as Osama Bin Laden and Al-Qaeda were known in the United States, but following the attacks, terrorism has continued to present an issue that has not gone away. Although there has not been a terrorist attack since 9/11 with the same casualty and economic impact, the threat of terrorism has been something that American citizens are very aware of and can influence activity in the stock market as well (Straetmans & Verschoor, 2008). With terrorist activity still prevalent in many parts of the world like the Middle East, it will be important going forward that people stay informed on this potential threat.

The general fear of terrorism, as opposed to specific event-driven fear, has an influence on trading activity in the United States, and a research study done by Narayan & Sriananthakumar goes into detail to uncover the relationship between Terrorism and the Stock Market. Terrorism has been detrimental to many aspects of life both nationally and globally, and the stock market is definitely included in this as well. News of terrorism can result in much turmoil in the markets, especially in the short-term (Narayan & Sriananthakumar, 2018). There is also much importance placed on the timing at which the terrorism or risk of terrorism takes place and its effect on the stock market. Timing is a very important detail of this study, as a country’s phase in the business cycle will have an effect on how the stock market reacts. Gains or losses from the stock market are different depending on these details. A terrorist event occurring while the economy is in a contractionary phase may result in significant negative effects, as was seen during 9/11 (Narayan & Sriananthakumar, 2018). However, there is the rival notion that during times of expansion, there may be more of a noticeable and shocking impact. This is the idea that reflects how something terrible happening during a time of great prosperity will have a more shocking impact, as opposed to if times were already in turmoil(Narayan & Sriananthakumar, 2018).

This idea is verified in the research and analysis done. It concludes that countries experiencing expansionary phases will see a more significant impact than countries going through a contractionary period. Even with this finding, the overall data and research conclude there is great sensitivity to risks of terrorism, and it will influence stock market portfolios in any type of economic state (Narayan & Sriananthakumar, 2018). The effects may be greater during expansionary business cycles, but this clearly did not make a difference when looking at 9/11, the most severe terrorist attack ever on U.S soil. As was explained earlier in this section, the United States was experiencing difficult times in the economy prior to 9/11. This attack made recession more of a reality, as recession did loom in months prior (Weller & Scott, 2001). 9/11 truly did change the United States forever, and the research and literature reviewed in this section show the immense stock market impact as well.

The Stock Market reaction following natural disasters in the US

While the September 11th attacks on the World Trade Center had clear severe impacts across the stock market in the US, natural disasters result in different impacts to the stock market By comparing the stock market reaction to 9/11 as opposed to natural disasters such as Hurricanes and Earthquakes, you can see effects are certainly greater on a national scale. The local nature of natural disasters does not result in the same reaction seen across the country following a tragedy like the September 11th attacks (Carter, 1994). However, the markets still do react in different ways following a natural disaster. Unlike 9/11, there have been many natural disasters throughout the history of the United States, Hurricane Katrina being the largest in terms of damages. All disasters are different in terms of location, magnitude, and many other factors. However, certain market trends can be seen when analyzing a collection of various disasters that have taken place on US soil.

The United States and Japan were the countries of focus for a study done by Wang & Kutan, as a plethora of natural disasters have occurred in both of these countries over the course of history. The research examined the S&P 500 for the US, as it has a wide index of industries and companies it is comprised of, as opposed to just looking at a single asset or industry (Wang & Kutan, 2013). There were no significant impacts on the S&P 500 following natural disasters based on this study. Natural disasters have less of an impact on the wide indices of the stock market that are made up of many different companies and industries. This finding demonstrates that diversified stock portfolios can help fight against any major impacts a natural disaster may have on the stock market. That is not to say there are no effects on the stock market at all, as certain sectors of the can be impacted heavily depending on the details of the disaster, such as location, timing, and more.

One specific example was Hurricane Harvey, which took place back in 2017 in the state of Texas. The market impacts were very mixed, depending on which industry is examined. In the case of Hurricane Harvey, stocks hit the hardest were those in the oil and gas space, as the areas of Houston, Galveston, and Corpus Christi are major producers of the resource (Gurdus, 2017). While there is a clear risk for stocks to drop following a natural disaster, there are still some gainers in these times of turmoil. Insurers surprisingly have seen some positive growth in their shares following these types of events. One example of this finding came after Hurricane Katrina, an event that caused $100 billion in damage (Gurdus, 2017). Shares of insurance companies actually saw very solid gains in the months after the disaster, following a short sell-off period.

This trend was also found in the research study done by Wang and Kutan, which inspects the S&P 500 in the US following a variety of different disasters. A conclusion that was drawn here showed potential for gains following a natural disaster. Even with an industry like insurance that could be hit hard by having massive losses to cover following this event, there is much potential for capital gains as people become in need of their support. These stocks often will see an initial decline, but rise even higher than they were before a catastrophe (Wang & Kutan, 2013). The main point I found through this research was how much the stock market can become volatile for certain industries during natural disasters. As this research shows, having a diversified portfolio is the best way to not be severely hindered by these types of events. There are areas of the stock market that do not face any major impacts because of an earthquake or hurricane, while some will be hurt severely. Diversifying is generally thought of as a good investment strategy by experienced and successful investors, and this certainly holds true in times where there is a natural disaster.

The Stock Market during the Coronavirus Pandemic: Feast or Famine?

The Stock Market’s reaction to the Coronavirus pandemic has been very interesting to examine as well, as it continues to evolve each day. A research study done by Ngwakwe analyzed the stock market 50 days prior to Coronavirus vs 50 days following lockdowns. The impacts are prevalent and similar to the 2008 financial crisis, a lack of economic and financial safety caused masses of people to panic in the market, bringing stock values down sharply (Ngwakwe, 2020). This research study collected stock market data from 50 days prior to the pandemic and 50 days after it, comparing the effects that were seen. The two U.S stock indices that were the main focal point of this research were the Dow Jones Industrial Average, as well as the Standard and Poor’s 500 Index (S&P 500). The results of this analysis display a more significant impact to the Dow, with the average value of its stock prices reducing more than the S&P. Yet, the S&P’s average value was still higher before the pandemic but did not drop as rapidly as the Dow (Ngwakwe, 2020). Some of the tech giants that are listed in the S & P 500 such as Amazon and Facebook have actually seen major gains during the pandemic, which is a possibility for this index not being hit as hard as the Dow (Sokol & Pataccini, 2020). This type of research has intriguing results that could be useful to policymakers as well, while also helping in preparing for future pandemics that could ensue (Ngwakwe, 2020).

The location at which the virus originated has also amplified the troubles seen in the stock market. China is a global superpower, contributing to much of the world’s output in categories such as manufacturing, technology, and more. This pandemic starting in China caused great concern not just in China, but globally, as many countries rely on Chinese products to stimulate their economies (Ngwakwe, 2020). Location does play a major factor overall when looking at the stock market reaction to a crisis. This trend has been seen throughout almost all of the crises I have looked at so far. The 9/11 attacks taking place at in the World Trade Center hurt the stock market in a massive way, while Hurricane Harvey’s adjacency to the oil-rich Permian Basin caused oil stocks to shoot down (Gurdus, 2017).

The timing at which the Coronavirus took place also resulted in a very appalling reaction as well. This is a similar trend that I discussed in the first section of my main body when examining the effects of terrorism on the stock market. The main point that the study from The International Review of Financial Analysis gets across is how shocking a moment of terrorism can be when the economy is in a strong state. While the Coronavirus is not the same as a terrorist attack, this principle can be applied to it as well. Prior to the Coronavirus pandemic, The United States was in a time of great economic growth with much success and prosperity across the country.

According to a report from the United States Federal Reserve, family income, as well as wealth, rose from 2016-2019, the years leading up to the pandemic (Torry, 2020). Stock prices increasing certainly played a role in this, as the median net worth rose 18%, for a total of $121,000. These gains were also widespread across many different groups, reaching a wide demographic. One example of this is looking at the Black and Hispanic communities, whose net worth increased at a fast pace, with Black households rising 33%, and Hispanic or Latino households rising 65% (Torry, 2020). This report is very interesting to look at, as it provides some context into just how shocking the impact of the coronavirus has been on both the stock market and the economy. Some general inference would believe that as income and net worth increase, so does investor confidence in the stock market. But, when a global pandemic causes millions to lose their jobs and struggle to pay bills, investor confidence can take a major turn.

Another stock market trend that has been seen in times of crisis in The United States is best characterized by the “feast or famine” analogy, which is the contrast shown between either having too much or too little of something. Despite the coronavirus resulting in the fastest bear-market plunge in history, not all sectors were impacted the same (Sokol & Pataccini, 2020). When applying this analogy to the stock market in times of crisis, research has demonstrated that there is potential for companies to see major capital gains during these times, while others can struggle to survive. This has been a trend most evident during the coronavirus pandemic of 2020, with technology companies like Netflix and Zoom, to name a few, seeing record growth as more people were required to stay home (Sokol & Pataccini, 2020). The famine in this case is also widespread, with airlines, oil, hotels, and many others struggling amidst the pandemic.

There has been so much inequality that has been a byproduct of the coronavirus, in the stock market and in the economy as a whole. Despite a major health emergency, there have been companies in the healthcare industry who have benefitted greatly. One “winner” has been Moderna, a company based in Cambridge, Massachusetts that had been reported to have been developing a vaccine for the virus back in June. This biotech firm’s stock price shot up 135% after this progress was reported (Sokol & Pataccini, 2020).

Moderna is not the only company in this section of the economy that has seen major growth since the pandemic, with many companies related to medicine and pharmaceuticals profiting massively. This is a similar phenomenon to the insurance companies that saw their shares rise following Hurricane Katrina, as more and more people relied on their business in a time of crisis (Gurdus, 2017). With some of the winners that have gained from this crisis, there are also many companies and industries hit hard by the pandemic. There are a complex number of firms and corporations who have struggled heavily because of the pandemic. As mentioned earlier, oil and travel-related firms (hotels, airlines) have endured especially difficult times in business since March. During lockdowns, the tourism and hospitality industries faced a steep decline to 70% (Sokol & Pataccini, 2020).

With people unable to leave their homes across the country at the beginning of the pandemic, it is no surprise that these are a few of the many sectors of the economy that have held on for dear life in 2020. The stock market may appear to be doing better than expected when looking at indices like the S&P 500 or Dow Jones Industrial Average, but the major capital gains from some of the “winners” can also mask how severely some losers been affected. In other words, the stock index covers a wide variety of companies and industries, so examining specific sectors as this research does gives a better sense of how businesses are actually doing.

Media plays a major role in market fluctuations in times of crisis

The media can play a major role in stock market fluctuations during times of crisis, as news can often influence investor confidence. This idea is explored more in-depth in a research study done by Manela & Moreira. This study uses the phrase “news-based measure of implied volatility”, or NVIX, to understand how the role of media can impact the stock market. Based on in-depth research, the findings demonstrate how fears surrounding news stories of disaster and hardship in the country will play a significant role in how investors will respond (Manela & Moreira, 2017). Based on some of these findings, it can be concluded that The NVIX responds differently depending on the event or disaster that is reported by the media. For example, there can be high volatility in the stock market associated with stories centered around world wars or uncertainties in policy, as one might expect. This showcases how pivotal of a role the media have towards investors, as a variety of crises or disasters, both large and small, will affect investment strategies (Manela & Moreira, 2017).

There is no perfect way to conduct research, and this study is honest about the challenges of determining the relationship between news and stock market volatility. One of the main challenges faced is the way that language and diction used in the media have changed over time. The sample size of the data spans all the way to the 1940s, making it difficult to see which types of words or phrases will spark panic when compared with the 2000s (Manela & Moreira, 2017). Even with this challenge, there were some interesting conclusions drawn from the research. It was found that investors are most reactive to events related to rare disasters, as well as possible concerns of war and policy (Manela & Moreira). An article from Baker & Bloom also examines this notion of news-based volatility in the stock market, displaying a similar trend that uncertainty being reported will have effects on the stock market (Baker & Bloom, 2020). The article uses examples such as 9/11, the 2008 financial crisis, and others to suggest that these macroeconomic concerns result in market fluctuations and uncertainty. 2001-2003 in particular was a time of major variability, with 9/11 and the invasion of Iraq being two events that impacted the stock markets, as well as Donald Trump coming into office in 2016 (Baker & Bloom, 2020). News of both crisis and policy changes are what charged market volatility, proving once again how important the media’s role is towards investors and how they will react.

These takeaways demonstrate the vitalness to report the hard facts, as they do impact the way investors will trade in the stock market.

Overall, this trend can be applied to any moment of crisis, making it very intriguing to look deeper into this relationship. The way people perceive certain news has a clear relationship to how they will invest, as much of this research shows. The term “news day” is one that is often used when discussing stocks, as a news story on a company can result in either a positive or negative on that share price depending on the details of the story. But, when there is a news story related to a national crisis, the impacts will be much more widespread than just a single company and can affect the market as a whole. There were macro-economic effects that were the result of each crisis that has been dissected in this paper, even though these were each different in their own way. The research studies discussed provide intriguing findings through their study of the media, which can be applied to almost any period of time, even as the world of media has changed. Newspaper headlines were once at the forefront of the media world, but with news becoming more and more digital, the implications are still very similar on social media and other digital platforms. Even though the form of news consumption continues to evolve, it is still a major driver in stock market fluctuations and how investors will react.

Conclusion

Overall, this has been a very intriguing topic to dive into and one that included no shortage of resources to research. One of the most interesting aspects of the research was seeing different trends that exist within the topic. The term “crisis” is a very broad one, and there are many different forms of crises that can occur in the world. For the purpose of my research, I specifically looked at notable crises that have taken place in our country’s history. The September 11th attacks, natural disasters that have taken place, and the Coronavirus pandemic of 2020 all have resulted in widespread impacts in many different aspects of society. However, with the stock market being the main focal point of this paper, there was some overlap seen in the effects that these crises have. For example, the News-based volatility section could be applied to all three crises that were covered, as the impacts of news reporting on the stock market has clear effects for all of these events. The timing of the crisis was another major point of this paper and played a role in the stock market reaction in each of the three sections. The research done on this topic is very important going forward, as there will likely be more crises that come up in the United States. By understanding how previous crises have impacted the stock market throughout history, it should help guide people through difficult times. There will still be moments of uncertainty going forward, as not all crises are the same. But, through the research and literature that has been reviewed, so much knowledge has been gained on the topic that will help in a big way as we move forward. Reviewing this literature on historical and recent crises improves understanding of these events when they come up in the future.

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