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Over the decades I have witnessed many share market downturns, but nothing prepares you for one that carries the wild fluctuations that come from a market slump based on a virus.
So, I want to share with you via personal experiences, some of the unique features of what we are seeing develop.
On Friday I called into JB Hi-Fi to buy a new landline that will work better with the NBN. They told me that they were having difficulty getting supplies. I had a similar experience with a pharmacy.
The name of the game in the next three or four months is going to be having the goods or materials necessary for trading.
Builders and tradesmen are having difficulty in completing contracts and many retailers will also struggle. There will be wild variations in corporate experiences.
And of course, airlines are experiencing a terrible battering and we will see some of them fall over.
Last Saturday I had to make a charity speech over lunch and was doing my preparation early in the morning and saw a late rally on Wall Street. And then as I looked at some of the cables it became clear that China expected to restore sizable chunks of the supply chain because they believed they had the virus under control.
I am naturally wary of such claims but they came from people in the factories, so I was feeling that maybe we would not encounter a major sell-off, but as I approached the venue I got an email to tell me that a doctor at the Toorak clinic who had coronavirus, had treated 70 patients and had visited an old peoples’ home.
I knew that was bad news and then came the shock that OPEC supply restriction talks had failed to come to an agreement and the oil price was set to fall sharply.
There was also a small reference to the fact that 1,000 people in the affluent Westchester County in New York had been quarantined. That was stock market trader country.
And so, from a feeling of Saturday optimism, there was then a grave risk that Monday would open with enormous selling, driven first of all out of the US.
As we all now know, BHP was hammered 12 per cent and the whole market was trashed. The next day, Tuesday, once again there was an avalanche of selling but this time it was matched by later buying inspired from the US and remarks by President Trump.
That pattern of share decline followed by recovery is being repeated several times a week and is being driven by great uncertainty as to the outcome, which is multiplied by computer trading and derivatives.
If you are operating in the market, be aware that in a bear market like the current one, often there will be major selling forces when the Australian market opens.
Often, they will come from overseas selling and on other occasions, it is the selling out of people who have bought stock on margin and can’t keep up on payments.
So, if you are buying stock, be ready for those sell-offs.
Historically, most downturns end with what I call ‘a day of no hope,’ when everybody is selling regardless of price. The next day stocks bounce back quickly to recover at least part of the loss.
Monday, March 9th was a major sell-off, but stocks didn’t bounce back the next day. Indeed, initially, they fell further.
Since then there has been a bounce and it’s government stimulus package time. Maybe we have reached the bottom but that’s a brave prediction.
I have been approached by a lot of people who are now being tempted to simply quit the market before it falls further.
My advice is always the same – if you are a trader you may punt fluctuations. But if you are a long-term investor, you have just seen a 20 per cent fall in the market and it could fall a bit further, but once you sell, it is very hard to get back into the market.
And this decline is being triggered by two events that I think will not be long term forces.
The first is COVID-19. It looks like China has got on top of this and I think other countries will too (albeit at a huge cost) and in time medical science will find a way around.
Given that I am in my late 70s, I am mixing with a lot of people that are very nervous given the high death rate in higher age brackets.
I was fascinated to see that Australia’s Mesoblast believes that one of its stem cell products can substantially reduce death rates in older people. But of course, it has to pass the necessary testing process to get to market, unlike other drugs, this should only take a few months.
Artificial intelligence has speeded up the research process so there is a very good chance that the impact of the virus will be a memory by the end of the year.
And the oil gymnastics is a situation where all the major players – Russia, Saudi Arabia and the US – will suffer from the war, so I believe there is a very good chance that a truce will be reached in a month or two.
That means that the two major drivers of this bear market are not long-term forces and may become a memory when we reach 2021. That means there will be a very strong recovery in the market – those that sell out now will need to be very skilled to get back in again.
And on the speculative side, it is now clear that China has decided that it will not intervene in the Hong Kong protests and will let Hong Kong go into severe decline.
When it has fallen far enough China will ride in as the major “rescuer”. That and the destabilising facts of the coronavirus is likely to trigger an increase of repatriation of money abroad and a rise in quests for citizenship and visas.
If that happens, then the scarcity of property that we have been watching for the last few months will reappear.
Normally a fear driven stock market fall would affect the residential property market within six months. That still might be the case, but all those involved in that market will be watching events in China very carefully.
One of the most disturbing aspects of this fall has been the very big fall in bank shares both in Australia and around the world.
The market clearly believes that the environment for banks in all countries is going to be much tougher – they will be hit with bad debts via the effect of the virus on their customers and by the repercussions of the oil price war particularly in the US.
But also, the markets fear that banks are the next chapter in the digitisation of markets.
Newspapers are perhaps the best example of a very popular medium that was decimated.
Banks can avoid this process but will need to develop much better relationships with their customers and products that reinforce that enhanced position.