Markets React to Coronavirus


Markets React to Coronavirus  

The stock market has caught the flu! Or COVID-19, more precisely.  It looks like two weeks in isolation might be required for Wall Street and other exchanges to correct themselves, before they can head back to work.

The headlines will undoubtedly be unsettling, and the past seven days’ consecutive losses even more so.  Indeed, indices in America and closer to home in Europe are now 10% off their recent highs, with a market correction which could potentially now lead to a bear market.  The notification on my mobile last night read ‘Dow Jones falls by almost 1,200 points to record biggest points fall in history’, whilst this morning it was ‘US markets experience their worst week since the global financial crisis of 2008.’  Dramatic stuff. 

The spread of coronavirus is an ever developing situation, and has rather fittingly been described by a number of CEO’s as a ‘very fluid situation.’  As such, it would be misleading to attempt to predict how the coronavirus fiasco will play out.  Likewise, it would be a cliché to write a reassuring newsletter with a tagline such as ‘Don’t Panic!’ – not the words of Lance Corporal Jones from Dad’s Army, but in-fact Mr. Trump to the American populous on Wednesday. 

What we can do is deliver an amalgamation of stories and opinions from people within the investment industry, giving our clients an insight, information and the opportunity to formulate their own opinions.  We will of course, naturally, want to reassure you. 

Warren Buffet sent out his annual investor letter over the weekend and advised not to buy or sell, posing the question whether the 10 or 20-year outlook for American businesses will have changed over the past week because of the virus.  Tom Porcelli, chief U.S. economist at RBC Capital Markets, thinks that the markets’ reaction to the virus ‘boggles the mind.’ He argues that whilst we should expect a supply shock, nothing has warranted a 10% repricing in a ‘market that is supposed to be forward-looking in nature.’ 

CEO of Allianz, Oliver Baete, suggested there has been a lot of unwarranted panic and compared the virus with a strong flu, suggesting the global economy will only see a short-term impact and reassuring people that ‘the world will not end tomorrow.’  With Sky News following the virus around the globe like its the black death or some sort of apocalyptic disease these words are reassuring indeed! In the interview Baete reminds people that as long term investors (as this firm are) Allianz do not react to daily, weekly and even monthly new stories. 

Terry Lundgren, former CEO of Macy’s, has suggested that the US-Sino trade war and coronavirus outbreak has revealed that retail supply chains are too dependent on China.  Perhaps, after the events of this year, this will change. Tim Cook did not even address the virus in Apple’s annual shareholders’ meeting earlier this week. 

On CNBC, portfolio manager Pieter Taselaar of Lucerne Capital Management criticised the responses of CEO’s, suggesting they have ‘no clue’ of the impact of the coronavirus.  He is not hopeful on 2020 in terms of company earnings, and has suggested it could be ‘a lost year for earnings.’  Similarly, Goldman Sachs have predicted US companies would ‘generate no earnings growth in 2020.’  Indeed it could be suggested that the world economy is long overdue a global recession, given that the long sustained global growth has been due to the intervention of central banks and significant monetary easing. 

The problem with the bear case is that central banks and governments are exploring ever more extreme ways of inflating the global economy (witness the Hong Kong Government giving every citizen the equivalent of around £1,000);  until the tap is turned off (or, more likely, the pipe is capped) this surplus global liquidity will find itself supporting equity valuations. 

A mixed bag of responses, indeed. 

We would point out: Your investments are long term;they are sufficiently diversified across different asset classes with the aim of mitigating risk;they have sufficient capacity to withstand the risk of investing – if they did not, you would not be investing. I shall look forward to discussing your portfolios in our forthcoming spring review meetings.  In the meanwhile, please do not hesitate to contact this firm should you have any questions. 
Andrew Longbon
For, and on behalf of, Longbon & Company.
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