FINANCIAL ADVICE CENTRE NEWS
Your Spring Newsletter 2020
It’s going to be difficult to talk about anything other than the outbreak of COVID-19 in this quarter’s report. But we can start by casting our minds back to the beginning of January when it was largely contained to China, and western countries were unaware of the impact that the virus would have in the coming months.
Global news before COVID-19
The turn of the year saw President Trump orchestrate the assassination of Iranian general Qasem Soleimani, bringing an abrupt end to the buoyant mood enjoyed over the festive period. Of immediate concern at the time was the lack of clarity around the extent of Iran’s retaliation to the assassination. The press quickly jumped on the speculation that World War 3 was imminent.
Raging wildfires across Australia were widely publicised and while this didn’t have a direct impact on equity markets, it certainly added to the rather distressed mood already in place. Despite the particularly unstable situation, global equities remained resilient and a fairly rapid de-escalation of the US-Iranian tensions provided comfort to markets.
Hot on the heels of this was news from China of the first confirmed death from COVID 19 on 9th January, initially considered a non-event by equity markets. A welcome distraction was also provided by the official signing of the phase one trade agreement between the US and China, which actually pushed markets higher.
On home shores, January saw the widely expected UK parliamentary vote in favour of Prime Minister Boris Johnson’s Brexit deal, paving the way for Britain to leave the EU on 31st January, helping to support equity prices further.
Virus and oil news take hold
As the severity of the virus spreading across China became more apparent, markets were spooked. By the end of January, the World Health Organisation had declared the spread of COVID 19 a ‘global emergency’. Investment markets were quick to react, with an initial 8% fall in the Chinese stock market, and c. 2.5% falls from other developed markets. Interestingly, these falls had broadly been recouped by the middle of February as bargain hunters saw an opportunity to purchase ‘cheap’ stocks.
But the big moves came around 19th February. The extent of the virus’s spread outside of Asia meant it now threatened the United States and the Eurozone. There was no denying that this would cause a serious global economic shock and the initial market recovery was brought to an abrupt end.
And this was not all. At a summit in early March, the Organisation of Petroleum Exporting Countries agreed to cut oil production. This was an attempt to prop up the commodity’s price, which had been hit as a result of falling demand from the virus outbreak. However, Russia argued that it was too early to cut production until a clearer assessment of the virus’s impact on the oil price could be made and refused to cooperate. Saudi Arabia proceeded to ramp up production extensively, to which Russia responded by increasing its production simultaneously. The result – an oil price war of monumental scale and a spectacular decline in the price of oil almost overnight. The impact that this has had on the recent stock market sell-off should not be underestimated.
A period of extremes
Investors are all too aware of how market reactions to the COVID-19 outbreak and crashing oil price have negatively affected their portfolios. But to highlight the truly unprecedented levels of volatility we have witnessed, we have summarised below some of the movements seen since late February:
- Global markets have fallen in the region of 25%, posting their fastest ever sell-offs in history
- The FTSE 100 shed 17% in a week, its worst since 2008
- Wall Street saw its worst single day percentage drop since 2008
- Oil prices reached an 18-year low
- Sterling hit its weakest level against the dollar since the 1980s
Wall Street had two of its worst five days ever, just days after its fourth best day on record
- S&P 500 rallied more than 9% in one session, only to be trumped a few days later by its largest daily rise since 1933
- The Dow Jones broke three records for the worst daily drops in history
- The Dow Jones recorded its biggest point gain in one day, ever
- In one month, the Dow Jones posted its record high, fastest correction and best week on record
- The S&P 500 had its worst day followed by its best day since the financial crisis
The FTSE 100 rose 9% in one single session, its second best on record
- Global stock markets had their best and worst sessions on consecutive days
Governments & Central Banks respond
Governments and central banks have been quick to react to the evolving situation and moves so far have been broadly well received. The powerful cocktail of monetary and fiscal stimulus measures, have provided truly unprecedented levels of stimulus to cushion the impact the virus will have on the global economy.
Policy makers around the world have slashed interest rates, provided direct aid to corporations and small businesses, and provided direct aid to individual employees (including the self-employed). This is along with providing much-needed liquidity in the form of bond and equity purchases from central banks.
In an attempt to slow the physical spread of the virus, governments have effectively closed their economies. Widespread banning and/or restriction of the movement of people wherever possible has been accepted and understood by the public. But this has created truly uncharted territory for stock markets as they struggle to accurately price the implications this will have for companies. Markets can price risk, but they cannot price uncertainty.
Many of the huge daily gains seen from equity markets were a direct result of the stimulus and lockdown measures put in place. But criticism remains over the lack of a united response from world leaders which has been a core driver of the extended sell-off. Unlike in 2008, when a coordinated G20 response was used to fight the financial crisis, world leaders seem to be in disarray. However, in recent days we have started to see an increasingly unified response from governments which has helped markets.
Discovering a new normal
In the coming weeks we expect the market to begin to adapt to the new normal, as panic selling eases and more information becomes available about how long the economic shutdown is going to persist. This will also include detail on how likely it is to recur, and when medical breakthroughs will be made to deal with the underlying problem. As this happens, markets should find their feet and much more reasonable assessments can be made about business valuations. Our investment partners tell us that until then, they will be intensely scrutinising any significant upward move in stock prices.
This is not the first pandemic the world has faced, nor will it be the last. However, we can take comfort that this time round, we have far greater capacities for remote working, enjoy better healthcare technology and have an increased understanding of how viruses spread. This should all help to provide a speedier economic recovery once the virus has subsided.
At Financial Advice Centre we are working hard with our team of investment experts to ensure your investments are positioned to benefit from this recovery when it does arrive.