Graph of the Week: The effects of pandemics on the DOW Jones, historically

16th March 2020

Source: BlackBee, Bloomberg, Forbes, March 2020

With globalisation and supply chains becoming ever more integrated, the economic effects of a pandemic are more complicated than ever. The effect of each pandemic on the Dow Jones Industrial Average Index highlight just how integrated the world economy has become over the years. During the Hong Kong Flu of 1968-69 the index lost just over 13% of its value, but when the Swine Flu Pandemic broke out during the recovery from the 2008 economic crisis it rose over 40%, in stark contrast. Since the outbreak of the ongoing Coronavirus pandemic, the Dow Jones has dropped over 25% with no end in sight.

The difference in the scale of losses between each successive pandemic shows just how linked the world has become, and how a restriction in supply can severely harm the world economy. The pandemic has led investors to flee equities and into safe havens such as bonds, pushing the entire US yield curve below 1% for the first time in history.

Oil price war a hinderance to economic recovery from Coronavirus
Global stocks were sent into a further free fall this week following a 30% drop in the price of oil, triggered by a breakdown in negotiations between OPEC, Russia and Saudi Arabia. Russia’s refusal to agree to deeper output cuts led to Saudi Arabia to initiating an aggressive price war. Saudi Arabia are increasing output to 12.3 million barrels per day starting next month (currently 9.7 million BPD), offering its crude oil at a significant discount. Russia have since stated that it has the capacity to withstand low oil prices for as long as a decade suggesting this could be a prolonged price war.

Declines in oil prices usually result in benefits for consumers through a trickle-down effect, as businesses can operate at a lower cost, resulting in discounted prices for consumers. However, this is a unique scenario in which an increase in supply is met with weaker demand due to the restricted economic activity caused by the Coronavirus.

The ECB’s long struggle to raise inflation towards 2% will also be severely hampered considering the ECB’s general rule of thumb  is that for every €10 drop in oil prices, inflation in the euro zone drops by 0.3pp within 2 months. The reduction in oil prices coupled with the fall in demand will undoubtedly hinder economic recovery.

Source: BlackBee, FT, March 2020

Monetary policy is not designed for pandemics & supply chain crisis
Monitory policies are designed and used to maintain economic growth with the aim of preventing and managing financial crises. The issue with monitory policies is that they are not designed for pandemics. They are not devised to deal with situations such as businesses losing supply, workers losing their jobs as a result, and remaining workers being sent into isolation. Central Banks, however, have reacted to the ongoing Coronavirus fallout by reducing stress on short term liquidity, in an attempt to stabilise markets and maintain economic activity as much as possible.

For the third time in a week, the US FED have announced action to calm markets, with a plan to inject trillions of dollars into the financial system. The announcement temporarily stabilised the market, however this was short-lived as the market returned to its downward course. This downward course was influenced by president Trump’s announcement to cut off entry from European flights, a move which hampers many industries, most notably the tourism industry. In Europe, despite Christine Lagarde’s announcement of an increase in bond purchases to the value of €120 billion, cheap loans to banks and its existing bank lending scheme rates becoming more favourable, the ECB received an immediate negative response, as many saw her speech as the ECB shifting responsibility to governments in the eurozone area. The spotlight is on Lagarde as many are expecting a more extreme response to the crises despite the question whether monetary policy is capable of aiding supply chain crises.

Source: BlackBee, FT, March 2020

Source: BlackBee, March 2020

At a glance:

  • The World Health Organisation has declared the spread of the Covid-19 Coronavirus as a pandemic. According the WHO a pandemic is declared when a new disease for which people do not have immunity spreads around the world beyond expectations.
  • NASA’s Earth Observatory has release images of the dramatic drop in Nitrogen Dioxide pollution over China between January and February 2020, since China introduced travel restrictions and the slowdown in economic output due to the Coronavirus outbreak. You can see the images here. 
  • Cryptocurrencies have seen dramatic drops in prices over the past month. Bitcoin dropped to €4,300 on Friday 13th, down from  €9,500 a month ago, in stark contrast to claims that cryptocurrencies are safe havens.
  • Service station brand Applegreen are dropping fuel prices by 10c per litre in Ireland on the back of the oil price drop as a result of the standoff between Russia and Saudi Arabia.
Source: BlackBee, WHO, NASA,, March 2020