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March saw the COVID-19 pandemic explode across developed market economies, most notably in the United States and Europe. Governments imposed lockdowns that brought consumer travel, leisure, dining, and entertainment activities to what is essentially a total halt of indefinite length. Markets crashed precipitously: at its extremes, the S&P 500 fell over 30% from its February peak.
Gauging and pricing the impact of COVID-19
We view the market decline in March as pricing in the first-order effect of higher risk premiums associated with a series of upside surprises to the spread of COVID-19 and its impact on developed markets. In a recently released draft paper by the National Bureau of Economic Research (Alfaro et al., 2020), the authors show that changes in aggregate stock returns are forecasted by day-to-day changes in the predictions of simple models of the spread of infectious diseases. For this month’s commentary, we produce a simplified model of the same using data from the Johns Hopkins Center for Systems Science and Engineering.