Volatile Financial Markets: How They Impact the Economy and You

The COVID-19 crisis has impacted more than our health concerns – it has also had a historic impact on the world’s financial markets, causing unprecedented volatility and economic shutdowns. 

The SDSU News Team spoke to Stephen Brincks, assistant professor of finance in the Fowler College of Business, to discuss how world events impact our financial markets and other sectors of the economy.  

What types of events influence the world's financial markets?

Any world event that impacts either business cash flows or corporate valuation (interest rates) will influence financial markets. The value of a business is determined by the discounted value of all future cash flows. If corporate revenues drop due to a world event like COVID-19, then stock prices will fall to reflect lower future earnings. Similarity, if demand for a commodity such as oil declines, then the price of oil will fall. 

How do these events create volatility in the financial markets?

Financial market volatility simply refers to changes in asset prices over time and is partly due to uncertainty. The greater the economic and financial uncertainty, the greater the financial market volatility. Right now, there is tremendous uncertainty about the impact COVID-19 will have on economic growth and corporate profits. As a result, financial market volatility has spiked and is likely to remain elevated until this uncertainty is resolved. 

How do the financial markets impact employment numbers?

Financial markets impact employment in many ways. Corporations raise capital directly from financial markets by issuing stock or bonds. If the financial markets are distressed or volatility is extremely high, then corporations may have to pay higher rates to raise capital. As a result, corporations will be less likely to hire new employees or undertake new capital investments.

Indirectly, many companies use changes in the stock market as a proxy for the state of the economy and may make corporate investment decisions based on changes in asset prices.

Additionally, financial markets determine interest rates for borrowing money and influence the interest rate that banks charge small businesses and companies to borrow money. 

What impact does a crisis or political uncertainty have on the housing market? Or on bank lending? 

In my research, I find that political uncertainty causes banks to reduce bank lending until political uncertainty is resolved. Before very close gubernatorial elections, banks wait to make additional bank loans until the outcome of the election is known. It’s likely that a similar dynamic impacts the housing market when a crisis occurs. Buyers and sellers may wait to list their home until uncertainty (such as future income, status of their job, potential changes in housing prices) is resolved. 

What impact will the $2 trillion coronavirus economic recovery package have on the economy?

The coronavirus recovery package was designed to benefit several parts of the economy that have been hard-hit by the coronavirus, including small businesses, large corporations, hospitals, financial markets, and individuals. Individuals will receive up to $1,200 (in stimulus funding), small businesses will receive forgivable loans to help pay expenses and keep employees on the payroll, and the Federal Reserve is providing liquidity to financial markets. Altogether, the objective of the recovery package is to cushion the negative impact of COVID-19 and help stimulate the economy.