Impact of Covid-19 on the UK Stock Market

Abstract

The COVID-19 pandemic caused unprecedented disruptions to global financial markets, significantly impacting stock indices and sectoral performance. This study analyses the FTSE 350 index during Lockdown 1.0 in the UK, focusing on market volatility, sectoral disparities, and public sentiment dynamics. The research tests three key hypotheses H1 (COVID-19 case growth is negatively correlated with FTSE 350 performance), H2 (Defensive sectors (Pharma, Utilities) demonstrate greater resilience compared to economically sensitive sectors (Travel, Retail)) and H3 (Investor sentiment, as measured by Google Trends, significantly predicts market movements). The findings confirm a strong negative correlation between rising COVID-19 cases and FTSE 350 performance, with a lagged effect of two to three weeks, suggesting delayed market reactions. Sectoral analysis reveals Travel, Retail, and Banks suffered severe declines, while Pharma and Utilities remained stable, validating the resilience of defensive sectors. Sentiment analysis highlights that search trends for terms like "unemployment" and "recession" were leading indicators of market movements, particularly for vulnerable industries.Additionally, while the FTSE 350 generally adhered to the Efficient Market Hypothesis (EMH), a “stickiness” effect was observed, where daily COVID-19 case announcements influenced market behaviour for up to a week. These insights underscore the importance of targeted financial support for vulnerable sectors, strategic investments in essential industries, and leveraging sentiment analysis for risk management. This study provides a framework for navigating future crises and enhancing economic resilience.