The stock markets are falling steeply around the world today following renewed concerns about the Coronavirus whose outbreak hit the market in 2020.
Declines are everyday food on the stock exchange and last year offered two corrections, ie declines of at least -10% from top to bottom, not to mention the 2018 tech frozen and decline of -17.90%.
But there is something special about heavy stock market declines during individual trading days; they burn on the retina and do not often attract stomach pain.
The reason for the dramatic stock market decline worldwide today is that we have begun to see the spread of the Coronavirus outside China. It adds to the worry of a global pandemic and the risk of crippling global economy with an economic downturn and recession risk around the corner.
Why was the decline so great?
Last year, the stock market rose significantly in response to the 2018 sharp decline in the wake of the tech frozen. The upturn continued into the new decade with record quotes in the US. The Coronavirus has been known since New Year’s Eve last year, but the market believed that the business cycle would now accelerate and that the outbreak of the Coronavirus would become a relatively isolated problem in China. But … it is rarely as you imagined!
The virus is a completely new disease and thus there is no immunity in the population compared to seasonal flu that is recurring. This leads to a rapid spread of infection and there is no vaccine at the time of writing.
Over the weekend, the number of cases outside China has accelerated significantly with South Korea at the forefront, followed by Italy and Japan. Now the market is beginning to worry about global spreading as this is beginning to tap into global supply. Thus, it is not only the number of infected that affect, but also the number of people who are at home, perhaps during a lockdown, where they can neither consume nor produce (work). This has a global impact as many companies have a negligible share of their sales or production in China.
During the financial crisis, we realized how globally intertwined the global financial markets have become. At the time of writing, we probably realize from another perspective how global our world is. China has long been the world’s growth engine and is thus the world’s second-largest economy after the United States.
In addition, a large part of our goods and services are both consumed and produced in China. Regarding the spread of viruses, it is worth noting that a little over 1.4 billion trips were made globally last year and the Chinese constitute the single largest tourism group globally. A tourism group that is rapidly sinking right now and thus has a noticeable effect on many companies that depend on Chinese tourists as well as on companies that depend on the Chinese consumer.
The downturn today was great because it was crowded in the emergency exit. The market has not really cared about the virus outbreak and reasonably believed it would soon blow over. Now we got a huge risk off-sentiment where many simply pull down the risk and see where this takes the road.
What assets benefit in such a climate?
In a strong “risk of” sentiment, the classic tendency is to flee to “safe” assets such as dollars, gold and interest rates. The gold price has risen +9% this year and almost +25% last year. The fixed income market was flushed with capital looking away from risk, with the effect that interest rates were pushed down.
In the US, we are only a few points away from the record low level of their 10-year government bond, which listed 1.32% in 2016. Paradoxically, companies with large borrowing requirements can reasonably benefit from more and more capital in the credit market, such as real estate companies. Although all companies are adversely affected on a day like this, it is healthy to remember that far from all companies is actually affected by the virus outbreak.
Furthermore, one can also consider which shares benefit from China’s lockdown. It is hardly a pleasant experience to just sit at home waiting for the virus outbreak to ebb, but something has to be done of the time.
One such thrill is that downloaded mobile games are speeding up. The Financial Times reports that the first two weeks of February saw a 40% increase in downloaded mobile games compared to last year. Tencent is China’s largest manufacturer of mobile games, but which other companies can benefit? Start thinking and try to figure out who can be the winners.
What assets are disadvantaged in such a climate?
The risk of sentiment we see on the stock exchange means that you pull all equity risk over a comb. You simply take the safe before the uncertain, but a decline that we saw today belongs to the unusual. In the long run, it is actually the company’s sales and profits that affect the share development. But there are some industries that are particularly disadvantaged right now such as tourism, hotels, restaurants, aviation, physical casinos such as Macau and more.
Can history give any guidance?
No one knows for sure how this will play out, but you can say for good reason that today’s downturn belongs to the unusual. The market is now aware of the risk of a global spread and the question is how we collectively choose to interpret the companies ‘figures when the reporting season starts and we see how this has affected the companies’ earnings.
An interesting thought is that Brexit was an event that should reasonably have a greater impact over a long period of time, while the Coronavirus will hopefully ebb out, although there is a large x-factor in that calculation and a real pandemic concern. Brexit offered a decline of -8.42% on June 27, 2016, but the case was recovered intraday already July 13 to close the entire gap on July 14, just two weeks later.
The US employment figure (NFP) in February 2018 took the market on the bed and lowered the stock market -6.10% for 3 days, then it delayed until May 8 before closing the gap. The US presidential election in November 2016 is also a classic. At that time, the stock market was down 3.60% at most to close +1.20% after Donald Trump’s speech.
Another curiosity in this context is that the stock market tends to swing back after sharp declines. Since 2009, the US Stock Exchange (S&P 500) has fallen by more than -2% on 18 other occasions during a Monday. On 15 of these occasions, ie in 83% of cases, the stock market has risen the day after and has given an average return of +1.02% according to Bespoke Investment Group.
How, then, should you act?
It is worth remembering that the best deals are done in the most awful of times. Although today’s strong stock market decline was substantial, the stock market is still higher than at the beginning of the year. A monthly savings is one of the most powerful tools available for long-term profitable savings.
This is partly because you are actually buying on an ongoing basis and that you do not have to make an active decision on whether to buy in the event of a stock market decline or not, it is done automatically. We should remember that we as a collective are happy to invest AFTER the stock market has risen and sell AFTER the stock market has fallen. An ongoing monthly savings removes a fairly large part of the psychology that often falls off the hook leg.
Let me even offer some classic and yet timeless graphs for an evening like this. A correction is a decrease of at least -10% from the top to the bottom and a bear market is a decrease of at least -20% from the top to the bottom. We have received corrections during 32 of the last 36 years, ie 88.9% of cases. We have experienced a major decline, usually called the bear market, during 14 of the last 36 years, ie 38.8% of the years. On average, a correction has lasted for 75 days while a bear market has been stuck for 186 days.