Robust Capital Markets Showcase Just How Far We Have Come Since the Darkest Days of the Pandemic

By Hugo Dante
The economy is on pace for a historic recovery just over a year after lockdowns swept across the country.
A record-breaking bull market, GDP growth at an annualized rate of 6.4 percent in the first quarter of 2021, a red-hot housing market, and a full recovery in corporate bond markets, all stand in sharp contrast from the conditions of just one year prior.
When news of lockdowns first spread and investors fully digested the gravity of the pandemic, a global flight-to-safety ensued. Redemptions swept across financial markets. Hedge fund liquidations in the first quarter of 2020 were the fourth highest in history at $33 billion.
Distressed bonds and loans outstanding totaled more than $500 billion at their peak, as corporate borrowers sought to tap a skittish market. Money demand rose sharply reflecting higher uncertainty, with market actors scrambling to pad balance sheets with a buffer of liquid assets and cash.
As a result, multiple records were set in capital markets in 2020. Investment grade companies in US bond markets borrowed more than $1.2 trillion, while speculative grade borrowers tapped credit markets for almost $300 billion, reflecting year-over-year increases of 68 percent and 79 percent respectively.
Most notably, however, is the more than $435 billion raised by U.S. companies in stock sales in 2020.  The ability and willingness of companies to tap equity markets is reflective of the extraordinary recovery in financial markets, driven by fiscal and policy support, liquidity assurances from the Federal Reserve and a rapid pace of vaccinations pushing up the timeline for reopening and a return to normal for the U.S. economy.
Rapidly improving investor confidence and optimism in financial markets has played an important role in the economic recovery. For example, strong preferences for reorganization over liquidations in corporate bankruptcies have prevailed during the past year, driven largely by the unique nature of the pandemic and the robust recovery in financial markets.
Company financials have been strained by contending with a zero-revenue environment rather than failing or obsolete business models. Optimistic revisions in investor expectations and liquid financial markets have generated confidence that restructured debt agreements and greater flexibility will be enough to support firms through the pandemic and to a strong recovery.
A bullish stock market has also proven instrumental for companies navigating the bankruptcy process. Optimism in financial markets, particularly among retail investors, has uplifted equity markets across the board, with the rally even reaching companies that have already filed for bankruptcy, providing a robust source of funding and supporting a recovery in M&A activity in the second half of the year.
Ultimately the dynamics of financial markets helped to contain corporate bankruptcies, keeping levels far below those seen in the Great Recession, now back to pre-pandemic levels.
As 2021 continues, signs point to a sustained recovery. Of the S&P 500 companies that had reported earnings for Q1 of 2021 at the time of the writing of this piece, 84 percent beat earnings estimates, significantly above the five-year average, with these companies indicating earnings growth of almost 24 percent. As more Americans get vaccinated and COVID-19 cases continue to drop, robust capital markets are yet another sign of how dramatically conditions have improved from the darkest days of the pandemic.
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About Author

Hugo Dante

Hugo Dante is a specialist in economic research in the Economic Policy and Research group at the ABA.