COVID-19 and its impact on the financial markets
The COVID-19 outbreak has caused chaos all around the world with businesses shutting down their operations and areas getting locked down. It has also sent market downwards as investors are frantically cashing in on their stocks as investors worry about a further drop in the market. As of 17 March 2020, the market has already plunged around 30% as the S&P500 index had dropped from approximately 3400 to 2400 points.
Also, the economic indicators in the US have portrayed the slowdown of the economy at unprecedented levels, with the Empire State manufacturing index having the largest drop in history.
Let us not forget that this is only just the beginning of the virus as the cases outside of China has only just blown up recently. With experts predicting that COVID-19 is here to stay till the end of 2020, we can expect the market to continue to fall short.
How should we react to the current situation?
While there is no definite answer to this, you should be worried about the current situation and also capitalise on the opportunities. In this chaotic period, we should worry about the spread of the virus and do our part to reduce the spread of the virus by confining to our network of friends and family and limit contacts with strangers.
As of Mar 2020, the virus has caused:
- Infections: 300,000
- Deaths: 13,000
And these numbers have not peaked yet in many countries. Hence, we can expect more cases shortly and countries will impose even stricter restriction this will cause a devastating impact on the economy.
However, in terms of your investment, we do not think that you should be worried. History has shown and proven that the market will recover. Let’s look at two of the most famous financial crisis in history. The 1929 Great Depression and the 2008 Financial Crisis.
In 1929, one of the worst economic downturns occurred the Great Depression, causing the market to fall by more than 90%. The crisis lasted for almost 10 years worldwide. The economic impact was very significant as by 1933 when the Great Depression around 15 million Americans were unemployed and nearly half the country’s banks had failed.
Another famous crisis is that of the 2008 Financial Crisis. It started in September of 2007 with the collapse of the Lehman Brothers’ investment bank. Before the crisis, banks have been taking on excessive mortgage risk, bundling and selling these risk as Mortgaged-back securities. Eventually, people started to default on the mortgage which led to the crisis.
Similar to the Great Depression, it caused massive sell-off in the stock market and the government had to step in to bail a few of the banks out.
As you can see, through the crisis, the S&P 500 index fell by more than 50% as there is a widespread sell-off in the stock market.
The takeaway from the financial crises
- Before the dip in both crises, the market has been growing very quickly, indicating a price bubble/stocks are overbought.
- Post-crisis, market recovers over time and eventually outgrows the post-crisis level.
- The fall in the crisis takes some time to fall to the bottom.
- Counter-intuitively, crisis causes the price to drop and is a very good time to buy in at a discount.
Looking at our current market, we can see similarities in that before the fall, there was a prolonged period of a bull market. However, one difference is that it only took less than a month for the market to fall by more than 30%.
The outlook of the market in the future — Will the market continue its bearish trend?
It is highly probable that the market will continue to fall as it is still quite difficult to estimate the impact of all the lockdowns and temporary closures of businesses. Moreover, many countries have not yet peaked in the cases of the COVID-19 virus and we do not and can not predict when will the virus end.
However, we also believe that now is not the time to sell your investments. This would be a good time to practice risk management and do Dollar Cost Averaging (DCA) to lower the cost per unit of your investments. We also believe that this is a very good opportunity to filter out the bad businesses from the good as this down period would be a good test for all the businesses out there.
Summary
- We believe that this is not the time to panic and sell away all your investments.
- This crisis is a good time to buy in stocks at a discounted rate.
- We believe that the market may fall further but we do not encourage investors to time the market.
- We also don’t encourage buying one lump sum at the current market price but rather split it out evenly over the next few months and practice DCA.
