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At the end of January, the World Health Organization (WHO) declared a global health crisis due to a new virus that had appeared in China. A few weeks later it became clear that the fight against this virus would require drastic, comprehensive measures in all affected countries – which soon turned out to be more or less the entire world.

On March 12, the Norwegian government introduced the strictest measures ever in peacetime, banning a number of events, introducing limited quarantines, partial travel bans and much more. And Norway was by no means alone. Within a few weeks, more than half of the world's population was subject to some kind of lockdown.

As investors quickly realised that this would have significant economic consequences, stock markets plummeted. In little more than a month, both the MSCI World Index and the Oslo Stock Exchange benchmark index fell by exactly 33 per cent. The bottom was reached on March 23.

Norwegian kroner nosedived as well in March. In periods of market panic, capital is typically pulled out of small currencies, but this time the impact was extraordinarily large: In but a month both the dollar and the euro rose by 22-23 per cent against Norwegian kroner. This was probably reinforced by the plunging oil price, which more than halved, though this does not appear to be the primary explanation.

In the bond market, this produced a particular side effect. Many funds hedge bonds quoted in a foreign currency to Norwegian kroner, in order to eliminate the currency risk for their unitholders. The counterparty bank then requires them to put up a margin as collateral. With the sharp rise in foreign currencies, margin requirements increased as well. More capital had to be lined up as collateral.

Markets do tend to overreact on the upside as well as the downside. With the pandemic seemingly under control, the plunge in March appeared to have been an overreaction.

In March, we saw this very scenario playing out – in record time. Many bond funds were forced to raise liquidity quickly and in the absence of positive net subscription, this could only be done through selling bonds. This of course reinforced the fall already underway. Even relatively safe bonds were affected.

On the other hand, the significant weakening of Norwegian kroner helped cushion the fall in the value of shares and bonds denominated in foreign currencies.

After the culmination of the panic in spring, the market sentiment eased somewhat. Infection rates decreased, society after society was reopened more, and – not unexpectedly: powerful countermeasures were implemented. Key policy rates were cut, securities purchases were increased or initiated, and fiscal policy was quickly changed in a significantly more expansionary direction. Both direct support, general distributions and more lenient tax policies were implemented at about the same time in many countries. In the United States, which seems to have fared somewhat better through the pandemic than many European countries, the government budget deficit is estimated to have reached 15 per cent of GDP. Historically, this is very high indeed.

Such powerful measures seldom fail to produce powerful effects. Although, early on, it was clear that GDP was bound to fall sharply in 2020, practically everywhere, the belief grew that it was essentially a temporary setback.

Furthermore, markets do tend to overreact on the upside as well as the downside. With the pandemic seemingly under control, the plunge in March appeared to have been an overreaction, which in turn reinforced beliefs in a further appreciation, helping the market to focus on the following years.

This ushered in a period of partly self-reinforcing appreciation, supported by the confidence that bull markets tend to build. Well into the autumn, this was further reinforced by reports of imminent vaccine solutions. At the end of the year, it became clear that vaccine rollout was underway.

Moreover, the rise was not disturbed by geopolitical unrest. There was some uncertainty about the presidential election in the United States, but the election itself went smoothly and the markets breathed a sigh of relief.

And so, 2020 ended as a year with new all-time highs on several stock exchanges. On Oslo Børs, the last four trading days offered four new all-time highs in a row.

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