Coronavirus: A market perspective
The world is in the midst of a battle with the coronavirus Covid-19. More than 240,000 people have tested positive for the disease, with the real number of cases expected to be significantly higher. Tragically over 10,000 people have so far lost their lives.
In order to attempt to get the spread of the virus under control and to limit the impact on the health of the public and public health services, authorities have implemented a variety of emergency measures, including restrictions on travel, the closure of schools, the cancellation or postponement of sporting events, and various levels of quarantine. These are truly unprecedented times.
The impact on the global economy of the virus itself and of the measures designed to tackle its spread will be significant. This is being reflected in global stock markets which are experiencing sharp declines, with the MSCI World Index in bear market territory having fallen by more than 20% from its peak, along with other major equity market indices.
While the selling has been broadly indiscriminate, some sectors have been harder hit than others, including airlines and hotel operators impacted by travel bans, retailers by the prospect of store closures and the potential impact on sales from a decline in consumer confidence, and bookmakers due to the postponement of almost all major sporting events over the coming months.
It is commonly said that the cause of the next major market downturn will almost certainly not be the same as the last, and this has once again proven to be accurate. While many have paid close attention to the health of the banking sector and elevated valuations on certain technology stocks over the last ten years, nobody predicted that a global pandemic would finally end one of the longest bull markets in history, one that has often climbed a wall of worry since the global financial crisis.
That said, while the cause of this market downturn is different to anything that has been seen before, the behaviour of financial markets and its participants has been relatively typical of previous declines, and from that we can perhaps draw a quantum of solace. Like in the global financial crisis when concerns over sub-prime mortgages were first aired several months if not years before equity markets began to react, a number of major equity indices hit fresh record highs several weeks after news of the virus’ outbreak in China had emerged. Expectations that the impact would be limited, and that the economic recovery would be swift, have since been replaced by a degree of panic and fears over just how bad this could turn out to be. These are emotions that historically have not served investors well.
Many aspects of the monetary and fiscal policy response have also been seen before, and while not perfect, have had previous success. Monetary policy easing has been announced by most of the world’s major central banks, including lower interest rates, quantitative easing and measures to support the flow of credit from banks to the real economy and also to support the smooth functioning of financial markets that are showing signs of stress. A not dissimilar playbook to that used in the global financial crisis.
Fiscal stimulus has been provided in the form of loans to small and medium sized businesses, mortgage holidays, and tax reductions, while the US government has floated the idea of sending money directly to its citizens – a tool that has not been used in previous market downturns. Whether the packages announced so far will be sufficient to cushion the economic blow from the outbreak remains to be seen, however, politicians’ careers can be made or broken in such environments and we are therefore inclined to believe their promises to do “whatever it takes”.
Furthermore, while the specific cause of the current market downturn is a unique one, we have seen a number of what we would consider to be event driven bear markets in history. We have conducted work looking at bear markets in the S&P 500 Index since the end of the Second World War and found that those that we would categorise as event driven have tended to produce sharper than average declines, but quicker than average recoveries. If the economic impact can be limited and the spread of disease can be controlled within a few months, there is reason to believe that this current episode would follow a similar pattern.