Markets have seen one of the fastest and sharpest fall in equity markets in history! From the highs to lows seen so far the falls are extreme .. the Dow is off by -21% , the S&P is down -20%, NASDAQ -20% & ASX 200 -23%.
Coronavirus was the ‘Black Swan’ event which had further fuel thrown at it through the oil price war coupled with travel bans around the globe. This has unnerved the markets to the point that even Central banks’ increasing liquidity in markets are being seen with disdain and fear causing a mad rush towards the exit.
The above chart was the Australian Equity market yesterday. Given the US markets have fallen between 11% and 12% last night/early morning today, we are in for another tumultuous ride today.
The last time we saw this type of panic was only just over a year ago – when world markets got hammered back in December 2018.
- What we saw then was as markets fell, the panic set in & as the selling hit
- With the markets falling so quickly it created huge waves of margin calls and that generated more selling (as we have seen this time as well).
- The absence of any ban on short selling further exacerbated the selling.
- Then we saw the blow up of a few leveraged complex ETFs – that saw more selling and more spikes in volatility.
- But as we now know, markets staged a super rally & the US recession that was going to come in 2020 never materialized & world markets ended up +20% in 2020.
But isn’t this different to the last sell down …
- Yes it is – the factors are different this time as it has been onset due to a virus.
- All major market selloff are different each time. However, the way the people react is always the same – human psychology is the same in 2020 as it was in 1988, 1950, 1940, 1900 & even in 1637 (the Tulip mania & collapse).
- Fear drives markets and its looks hopeless when one is in the spiral.
- When it ‘feels like” it’s going to get worse & when everyone is in agreement (there is consensus), that is when markets turn up!
This is not a long-term problem but a short to medium term massive disruption – it will eventually pass.
Look at just 2 examples of stocks and how they performed during the GFC and post (before this recent correction).
- Macquarie: up 653 per cent
Macquarie shares have grown significantly since hitting a low of $19 in late February 2009. Today they are trading at around $128, a 653 per cent increase in just over a decade.
- CBA: up 182 per cent
Its shares were trading at $29 in early January 2009. Since then the group’s share price has risen 182 per cent to $82.
There are hundreds of these examples in history.
With all the liquidity being ‘thrown’ at this problem, when the virus finally abates (and it will), markets will be awash with money looking for a home. This weight of money will be a massive tail wind for the equity markets which will recover and then some in time.
However, patience and resilience are the key to successful investing in times like these.