The recent outbreaks of COVID-19 have forced almost every European country to take drastic measures to counter the virus by closing schools, public events, and even their borders. The US’ president Trump declared the state of emergency for the US and already news is surfacing that the medical preparedness wouldn’t be to a sufficient level to cope with the upcoming crisis. All of these events had a significant impact on the financial markets.
Swings of plus or minus 10% in the globe’s largest indexes indicate that investors do not agree on the impact that COVID-19 will have - The battle between the bulls and the bears. I refer to the article I wrote about the balance between risk & return on my website (https://www.investmenttales.com/risk-return). And since not everyone is aligned on the potential outcome/risk of the virus, no-one is sure about the return to expect from the markets and at which prices to buy or sell assets. People are sensitive to information that is being released, and overreact to it. Hence the swings of plus and minus 10% on major indexes. Take this example: If you take the SP500 as a reference, the first decline started around February 19th (-15%). This whilst the virus was first detected on December 31st 2019, discovered in more countries around mid-January, and first evacuations started around end of January. My point is: Why did the markets decline sharply only at the time where there were +75k confirmed cases of COVID-19 worldwide, and not earlier? And why did the markets continue to climb up until that point?
From my perspective, with the news I was given about COVID-19, I couldn’t foresee that that was going to happen. COVID-19 was something distant, something curable, something not much worse than the seasonal flue. It could have had a small impact on the markets, but nothing major — was my opinion back then. Now, I reside in Belgium, where the national government announced last Thursday that schools, bars & restaurants will be closed until the 3rd of April — at least. This announcement was made shortly after they communicated that all events with +1000 people would be cancelled. As of today we are facing a lockdown. Now Italy, France and Switzerland are already in lockdown, Netherlands drastically reduced societal life last week,… From my current perspective, and with all the news flying around about exponential outbreaks, lack of medical capacity if we were to reach a contamination peak which would be too high, etc… My opinion would be that COVID-19 is something terrible, which will have a much more significant impact on the markets. Or at least that is why my emotion tells me. If I were to follow my emotions, I would have sold my entire portfolio after the announcement of my government —at 30% loss since its peek. However, if I would have done that, I would have missed the 12% positive rebound the day after. Nowadays, messages surface that China is coming to its feet, South-Korea is containing the virus pretty well, that labs are making progress in finding a cure and that countries are better prepared because of the prior examples in the first-hit countries like China & Italy. Folding@Home project — A huge project connecting thousands’ of people’s home computers with the purpose of creating computational power for scientists to find a cure against COVID-19 claims it is making significant progress (More information, or if you want to participate https://en.wikipedia.org/wiki/Folding@home). Question remains: When will markets react to that information? And would you sell whilst reading those articles?
It is very hard, nearly impossible to time the market right. Research has shown that missing out on the best days of the stock market, can reduce your overall return by 50% on the long run. Research has also shown that stocks spend up to 7 times more time increasing in value, instead of decreasing (see image below). Did you know that, if you had invested on October 8th 2007 at the peak of the SP500 just before the 2007-09 crisis, and you would have kept that position up until the peak just before the COVID-19 correction, you would have had an annualised return of approximately 6,5%. But yes, markets move according to cycles and today we face a big downward cycle.
I would strongly recommend you all to read the following article and watch the video on my website (https://www.investmenttales.com/market-performance-economic-cycles). It gives great insight in how the 'economic machine' works. When completed, and if you would have spare time during a lockdown -for example- I would recommend you to read 'Thinking, Fast and Slow' by Daniel Kahneman. This will give you more insight in how people’s brain work and react to events like these and how people tend to reference back to their most recent experiences to define their short-term future beliefs—which in this case, are negative. Hence the panick.
Don’t get me wrong - I do believe that the COVID-19 outbreak has a major impact on the global economy. Yet, I’m not convinced that this justifies a 40% drop in global indexes, with most probably even more to come. Yes, huge damage is being done because the economy is coming to a standstill. A well faring economy is not about stockpiling money, but rather having a good flow, redistribution of money through expenditure and income — and let that just be what we are missing today because societies are shut down. Nonetheless, positive signs emerge also amongst the news: Free movement of goods is strongly advocated within Europe, and is still allowed globally; monetary institutions like the FED have cut the interest rates; European countries are ready to support their (local) economies with huge aid packages ready to be injected in the economy: Italy €340bn, Spain €220bn, France €500bn, Germany €550bn, UK €363bn; with additional messages that governments like Germany and France are ready to temporarily nationalise their bigger companies if it would be deemed necessary.
This all being said, my strategy for the coming period is to not fold to my emotions, and to sweat out the stressful situation with the amount that I currently have in portfolio. I see the gigantic dip as a good buy opportunity and as such will significantly increase my fundings over the coming days. I will spread the additional fundings over a period of several days/weeks according to the Dollar Cost Averageing strategy (DCA - More information on https://www.investmenttales.com/dca) and re-allocate all funds periodically according to the Modern Portfolio theory (More information on https://www.investmenttales.com/modernportfoliotheory).
I want to stress that, besides my view on the economic and financial situation, all my thoughts are with the people currently in distressing situations. I would urge people to not forget that behind the financial swings, people are suffering from the underlying cause of this.