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A prolonged COVID-19 pandemic could lead to a sharp correction in the stock market, IMF warns

A prolonged COVID-19 pandemic could lead to a sharp correction in the stock market, IMF warns

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  • Should the COVID-19 pandemic continue for longer than expected, the economic consequences will likely lead to a sharp correction in global stocks, the IMF warned on Tuesday.
  • Extraordinary policy measures from governments around the world helped stem the decline in stocks since the initial February decline, but underlying economic conditions remain weak and the future outlook is highly uncertain, the IMF said. 
  • Investor worry over a potential prolonged COVID-19 pandemic could have been heightened on Tuesday after Johnson & Johnson paused its phase III vaccine trial due to an unexpected illness.
  • As long as investor optimism over easy fiscal and monetary policy continues, stocks can stay elevated for some time, but a significantly delayed economic recovery due to the persistence of COVID-19 could put a serious dent in that optimism, according to the IMF.
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The COVID-19 pandemic and its associated economic decline led to a sizable stock market correction that was stabilized thanks to extraordinary fiscal and monetary policy measures from governments around the world.

But there’s a real financial disconnect between the stock market and the economy, and while the disconnect could narrow if a swift and sustainable economic recovery materializes, the opposite could happen if the economic recovery is delayed due to it taking longer to get COVID-19 under control, the IMF warned on Tuesday.

“As long as investors believe that markets will continue to benefit from policy support, asset valuations may stay elevated for some time. Nonetheless, and especially if the economic recovery is delayed, there is a risk of a sharp adjustment in asset prices or periodic bouts of volatility,” the IMF said. 

Easy monetary policies like low interest rates and the buying of distressed assets, combined with fiscal stimulus, helped maintain the flow

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