Importance of Macreconomic Indicators During a Pandemic

Abstract

Stock markets around the world plunged in the beginning of 2020 as the COVID-19 virus started to spread. This led to the shortest recession ever, and the modern stock market had never seen such an event before. At that time, investors were not aware of what to expect going forward, neither the magnitude of the COVID19 virus nor how long it would last. The virus spread quickly and caused ripple effects on a global level, and the Scandinavian stock markets were no exception. Even though the recession was short, the repercussions were severe. The pandemic has led to long-term changes, both in stock market fundamentals and investors’ sentiment. Learnings from this short and very special business cycle will help investors limit their future risk and increase their predictability if and when a similar event will happen again. The thesis conducts panel data regressions of macroeconomic indicators qualitative analysis of stock market performance in the three Scandinavian countries, supported by theory on stock pricing. The main purpose is to understand how the severe disruption in business cycles has altered the Scandinavian stock market fluctuations. The thesis investigates the business cycles in Scandinavia ahead of the recession to understand the economic fundamentals when the pandemic appeared. Furthermore, the recession and the period afterwards are assessed to understand what has changed to take learnings from this in the future. This investigation has provided three important conclusions that future investors should benefit from. Firstly, investors have not paid enough attention to the most fundamental macroeconomic indicators, which is too risky given their impact on stock markets. Secondly, there was an inconsistent relationship between the development of macroeconomic indicators and stock prices. The indicators had low explanatory value after the recession due to high stock price volatility. Lastly, the Scandinavian sector composition impacted stock prices during the business cycles. The Danish stock market was defensive during the pandemic and is therefore attractive for investors during economic downturns. The Norwegian stock market was more sensitive and is favorable for investors when uncertainty is low, whereas the Swedish Stock Market is cyclical and favorable for investors during periods of economic growth