Coronavirus – Keeping things in perspective
Elevated volatility, political posturing, oil price shocks and sharp equity market falls have dominated this past week. Last night the S&P experienced a negative 10.87% move - the worst one-day performance since the 1987 stock market correction and its fifth biggest one day drop on record. The S&P has now extended its losses to 26.7% from its all-time high just a month ago. The European markets posted their worst ever single day performance and the FTSE 100 fell 9.5%.
Market falls such as these are not completely out of the ordinary, the remarkable element is the speed of the correction. Given this extraordinarily tough week for investors we thought it useful to summarise the week:
- Russia announced on Sunday that they would not support Opec with its intentions to curb supply of oil and instead insisted on the setting of oil prices by market forces.
- Crude dropped by a third overnight and settled at $31 a barrel on Monday.
- The market reaction was negative: the FTSE lost 9% and the Dow 8%.
- At the same time the World Health Organisation prepared to declare the coronavirus a pandemic.
- Trump announces that he has had a great meeting on Capitol Hill with regards to a fiscal stimulus package, although he gave no details.
- He launched a personal attack on the Federal Reserve for not cutting interest rates fast enough.
- The Bank of England cut interest rates by 0.5% to 0.25% and announced an increased lending facility of £200bn for banks to utilise.
- Rishi Sunak delivered his first Budget announcing a £30bn package to combat coronavirus.
- The lack of fiscal stimulus from the White House caused US markets to drop by 2.5%
- After the markets closed President Trump announced that the US is to block all flights from Europe.
- Markets reacted violently to Donald Trump’s ban on travelling, a move that was intended to calm anxiety over the pandemic. The FTSE fell 10.87% and the S&P 9.51%.
- The Federal Reserve promised to inject trillions of dollars into short-term funding markets as government bond trading began to seize up.
- The European Central Bank decided to keep interest rates on hold but announced a package of other measures to support the economy
- None of the monetary policy measures helped contain the market sell-off.
- The UK government moved from the ‘Containment’ to the ‘Delay’ phase in its response to the COVID-19 outbreak.
A month ago, markets were being supported by low interest rates, continued liquidity from the Federal Reserve and the verbal support coming from the White House in an election year. The coronavirus outbreak has been the pin that has pricked the equity/credit markets.
Health concerns change behaviour fast. This change in behaviour can negatively impact company earnings. This leads to the price of stocks to fall and finally a drop in gross domestic product. Without any certainty on the impact that the coronavirus will have on public health (and the economy) public markets will continue to struggle to find equilibrium pricing.
During one’s adult life one experiences market panics on a handful of occasions. It is important during these times to ensure that one pays attention to:
- The Key Central Principles of Investing
- Financial and Economic History
Remembering the key principles of investing and working with us should help you make sounder and smarter financial decisions.
Remember Mark Twain: "History doesn’t repeat but it often… rhymes."
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