Covid-19 Lecture on July 14: The impact on the capital markets

“Capital markets have swarm intelligence”

People were surprized when share prices bounced back within just a few weeks after the crash at the beginning of the pandemic.

The capital markets are often accused of taking short-term thinking to the extreme. But during the crisis it became evident that they actually have a long-term outlook. The assessment was: the pandemic is a natural disaster that can be overcome. And this is how it differs from the 2008 financial crisis, when it was uncertain for months what the long-term consequences would be for the economic system. As a result, share prices were slow to recover.

But eight weeks into the pandemic, many economists were unsure whether the economy would emerge relatively intact.

The capital markets are a good example of swarm intelligence. It’s not just individual actors involved. There are in fact millions. Their expectations for economic trends yield an overall picture that proved much more accurate last year than many individual forecasts. Of course there are differences from sector to sector and naturally this assessment could have been overturned by unforeseen events such as an especially virulent mutation of the virus. On balance, however, investors’ expectations were confirmed.

You show that we were not only able to observe the crisis with the stock market, but also to learn something about the market through the crisis.

An example of this is the discussion about the increasingly popular ETFs. These are funds that track a stock market index without the involvement of fund managers. The fund industry always argued that ETFs were subject to more uncertainty than managed funds, where managers can respond quickly in a crisis to minimize losses. It was not easy to investigate the truth of that statement because we fortunately do not have a big crisis every year. Now the events in the six to eight weeks from February to April 2020 showed: managed funds did much worse than ETFs.