The Spread and Impact of COVID-19
The annual Investment Company Fact Book provides a snapshot of the regulated fund industry over the past year. Fact Book specifically addresses major developments in the financial markets and accompanying macroeconomic events to shed light on how they affected the regulated fund industry—and the COVID-19 pandemic is an important backdrop to this analysis for 2020.
The public health crisis created by the swift spread of COVID-19 in 2020 caused countries around the world to impose social distancing and containment measures that effectively shut down large parts of the global economy. Because this disruption to the financial markets originated from a health crisis, not a financial one, it is helpful to discuss how it unfolded.
Spread of COVID-19
SARS-CoV-2 is a highly transmittable and pathogenic virus that emerged in Wuhan, China, in late 2019. From early 2020 onward, the virus spread from China to other countries. Cumulative confirmed cases of the virus increased in the second half of February in countries in the Asia-Pacific region, including Japan and the Republic of Korea. In Korea, cumulative confirmed cases accelerated rapidly in the second half of February, but flattened out fairly early in March, as its government imposed quarantines and social distancing measures.
From late February to mid-March, the virus spread rapidly in Europe; first in Italy, then to other countries such as France, Spain, Germany, and the United Kingdom. Beginning in late February, Italy imposed an array of social distancing and containment measures, including closing schools, restricting mass gatherings, requiring businesses to close, issuing stay-at-home orders, recommending telecommuting, and restricting cross-border travel. Other European countries adopted similar measures, generally by mid-March.
In the United States, cumulative cases were initially small—only 66 by the end of February—and remained low in the first half of March. By March 22, however, the cumulative number of cases had surged and the United States was leading the world in terms of new daily reported cases.
Measures Taken by US Authorities to Contain COVID-19
A review of how US authorities attempted to contain the virus is critical to understanding the depth of financial market stresses in March 2020.
Like governments elsewhere in the world, US authorities reacted to the outbreak with health mandates and social distancing measures. Such measures included imposing restrictions on travelers arriving in the United States from certain Asia-Pacific and European countries; ordering the closure of schools, universities, restaurants, bars, and recreational and entertainment facilities; imposing stay-at-home orders for employees who could work from home or whose work was not deemed essential; and prohibiting large social gatherings.
In addition, US businesses and institutions voluntarily undertook such additional measures as prohibiting employees from engaging in foreign or domestic travel and cancelling or postponing significant numbers of large conferences. Universities—public and private—sent students home. Households sharply curtailed dining out and, recognizing that travel would be difficult if not impossible, cancelled vacation plans and sought refunds from airlines and hotels.
Economic Effects of COVID-19, Health Mandates, and Social Distancing
The effects of social distancing and mandated closures were readily apparent. The mobility of US residents dropped precipitously in March relative to normal levels, especially in populous coastal states. This was particularly significant because New York City, the nation’s financial hub, closed down swiftly, bringing with it the challenge of keeping the financial system running under new and untried work-from-home arrangements.
Health mandates imposed by governments, and the social distancing approaches voluntarily adopted by others such as businesses and schools, effectively shut down large portions of the US economy.
Markets anticipated—and subsequent data confirmed—that gross domestic product (GDP) and business revenues would plummet, unemployment would skyrocket, the finances of municipalities and households would deteriorate, and all sectors would face challenges paying their bills. But there was vast uncertainty about what the extent of the damage would be, causing businesses, households, and financial market participants to become extremely risk averse.
COVID-19 Crisis vs. the 2007–2009 Global Financial Crisis
The COVID-19 crisis differs in many respects from the global financial crisis of 2007–2009. The global financial crisis was, at its root, a financial crisis that spilled over into the real economy. The COVID-19 crisis, in contrast, was a shock to the real economy that rebounded into financial markets. This is key to understanding financial market developments and the experience of funds.
Effect on the Financial Markets
In response to these swift and sudden changes, financial markets, which had generally not been affected by the earliest COVID-19 developments, began to slide. In February and March 2020, world stock markets contracted sharply, while bond and short-term funding markets dealt with increased demand for liquidity as investors sought to move to cash in the face of uncertainty.
The Investment Company Institute’s analysis of the impact of COVID-19 on economies, financial markets, and regulated funds was published in the Report of the COVID-19 Market Impact Working Group, which includes:
- The Impact of COVID-19 on Economies and Financial Markets (October 2020)
- Experiences of US Exchange-Traded Funds During the COVID-19 Crisis (October 2020)
- Experiences of US Money Market Funds During the COVID-19 Crisis (November 2020)
- Experiences of European Markets, UCITS, and European ETFs During the COVID-19 Crisis (December 2020)
In addition, the Institute published this series of blog posts on the experiences of US bond mutual funds during the COVID-19 crisis.
- Bond Mutual Fund Outflows: A Measured Investor Response to a Massive Shock (March 2021)
- What’s in a Name, Redux: For Bond Mutual Funds, “Corporate” Matters (March 2021)
- Growth in Bond Mutual Funds: See the Whole Picture (March 2021)
- Growth in Bond Mutual Funds: A Question of Balance (April 2021)
All of these publications can be found on the ICI COVID-19 Resource Center.