What a difference a fortnight can make! I last wrote a couple of weeks ago and over that time we have seen the global effects of the Coronavirus, so I thought I would write again to keep you updated.
I am sure you are well aware there is a global pandemic with over 183,000 cases globally, which we know of and 7,175 deaths. According to the Chief Medical Officer, we are still several weeks away from the peak, on 12 March Chris Witty said the UK is likely to peak in 12-14 weeks, which would take us to early June.
Last Thursday, the S&P 500 fell by 10%, marking its worst day since the 1987 crash. This was immediately followed on Friday with a market gain of 9.4%, the largest single day gain since 2009. We use the S&P 500 as a bellwether of the global markets.
What in the world is going on?
The markets like certainty and at present they have uncertainty in bucketloads. They work on a supply and demand basis and when this is distrusted, they react very negatively.
Because the US markets are 52% of the overall world markets by capitalisation, what happens in the US generally effects the rest of the world. The saying ‘when America sneezes, the rest of the world catches a cold’ is true, albeit possibly not the most appropriate analogy for today.
After the terrorist attacks of 9/11, the markets plummeted into well below today’s levels because of a disruption in demand, in the weeks and months that followed, shops and business were open, so supply was available, but the demand dried up slowing the economy because an economy needs people to spend money.
Americans particularly were worried and many stayed home in the following months, they were shocked and did not feel safe. However, over time life resumed and they started spending money again. The markets recovered from their lows in March 2003 and moved on to new highs.
The 2008/9 financial crisis was the opposite. Back then the big banks were reckless and the whole financial system froze and there was a lack of supply. No one could get a mortgage, many could not maintain the mortgage payments due to business risks. Without a supply of funds, businesses began to fail, reducing the supply of many things. Consumers felt less wealthy and were consumed by fear so did not spend and banks were not lending, so the flow of money significantly reduced. The flow of money is essential for a strong economy.
The markets “bottomed” in March 2009 down just over 50% from their high. Central Banks around the world stepped in with a variety of fiscal stimulus, which eventually gave consumers the confidence to go out and buy again and the economy and the markets returned to normal.
The financial stimulus stabilised the system and incentivised individuals to spend money (taking care of the demand side). Over time, people did start to return to normality and the markets fully recovered and once again moving on to new highs.
Today’s market conditions are a combination of both a supply and demand.
Like 9/11, there is a fear related to personal safety and the wellbeing of our loved ones. Normal fiscal controls are unlikely to work until confidence is restored, that’s why we didn’t see much of a boost in the stock market after the Fed or BoE cut interest rates.
We still have uncertainty, so demand will remain low during this period (unless you make loo rolls or hand sanitiser). The Chief Medical Office has told us that things will get worse before they get better, peaking around June. This is a health care crisis with serious financial side effects.
From a financial perspective, the markets will continue to be volatile until certainty can be brought back to the market, more specifically, the markets will need to believe the coronavirus is contained and that there is a path to defeating it.
There are a few options which can support this;
- A vaccine is found
- A cure is announced
- Treatment is available to reduce the spread.
- We find out millions of people have it, I feel that this would be incredibly reassuring because it would mean that far more people were infected than first realised. This, in turn, could mean many that are infected don’t get sick, which obviously means a far smaller percentage of those that are infected are dying. If we find the mortality rate is 0.2, for example, the markets could react very positively.
- The virus runs its course quicker than expected, or that it’s seasonal or others which you may think about.
All these scenarios provide an element of certainty and that’s what the markets are looking for, then fiscal support will have effects, but until then the markets won’t know if the fiscal stimulation is enough.
When leaders announce plans to curb the virus i.e. tackling the health care crisis, they are more likely to react favourably because this provides the markets with certainty.
Once we can see the health care is no longer a crisis, the markets will react very positively to any fiscal stimulus and a global pandemic like this would mean a coherent global response would be welcomed.
Crisis’s are defeated and this crisis will be no different, but we don’t know when for certain.
As with every crisis, there are things we can control and things we cannot, we want to focus our attention on the things we can control.
We don’t know when the markets will go down, or when they will recover. We don’t know for certain when the pandemic will peak and normality return. The day to day swings we experience in the markets are a reflection of that.
This will end, life will continue, and the markets have experienced crisis before and continued.
So what is our position?
We do not expect this to get better soon, or that the worst case scenarios will play out. We expect the markets to continue to be volatile and we are sure that it will pass someday and when it does pass, the markets will recover.
We are offering clients four scenarios which will reflect their feelings. Remember, it’s important you are happy and comfortable and what’s right for one person may not be right for another.
- For the majority of you, you will choose to remain in your current portfolios and invested during this time, appreciating that you do not need access to your investments in the foreseeable future and that this will pass.
- I would urge you to capitalise on this downtrend if you are a longer-term investor by rebalancing i.e. selling some of your more stable investments and buying the world equities, whilst they are cheap, to bring the allocation back into line.
Reduce your equity exposure
- You may feel that with the prospect of further market reductions, this would worry you and although you appreciate you cannot time the market, reducing your allocation in equities will allow you to rest better.
- Therefore, we can rebalance your portfolio selling some of your equities and increasing your bond holding.
Change your investment allocation
- We do offer a portfolio which has a far higher allocation to bonds, both long and shorter.
- This portfolio tends to perform better in market uncertainty like this, although it tends to underperform during growth periods.
- Some clients may want to still obtain a return, but feel a smoother ride would be better, this allocation is far different from your current allocation and includes a small allocation to Gold.
Switch to cash
- The final option would be that you really feel uneasy and although you appreciate it would be against my advice, you would want to switch to cash.
During periods of crisis, we have encouraged clients to rebalance their portfolios, taking advantage of buying more equities as the markets fall, this time will pass and if you have no plans to access the portfolio, it’s a great opportunity to buy.
Our clients who did this in 2000 and in 2007/8 came out not only with their portfolios in one piece, but all that followed our advice saw their portfolio move on to new highs, with each of our recommended investments fully recovering.
There is an opportunity here for the patient and the disciplined, but we appreciate it’s not for everyone.
This is a difficult time for all of us, some will be affected medically and others will have work and business worries. With good faith and kindness, we will all see this through, our thoughts and best wishes at Lexington are with you all, keep safe.