How are the markets really doing?
Seems like an easy question to answer, but as with all coronavirus-related issues, a lot depends on what sort of narrative you construct or follow.
So, yes, the S&P, the Dow and the FTSE have all dropped by significant amounts over the past few weeks, as the coronavirus effect has stormed through markets.
But comparatively speaking, how bad really is it?
Many commentators are saying that the current situation is worse even that 2008, because that whole crisis was largely manufactured inside financial markets themselves, where as this one is outside of markets altogether, at large, and highly unpredictable.
What’s more, although the man and woman in the street did feel the effects of the 2008 financial crisis, they didn’t feel it in quite the same way, and if you weren’t paying attention to news bulletins and had a secure job it was quite possible to miss the whole thing.
That’s not the case this time round. The crisis is general, and it’s affecting almost every strata of the global population. People know it’s happening, they can see it around them, and in that sense there’s no question that this crisis is more serious.
Whether posterity will come to look at how the world responded to coronavirus as an over-reaction can remain moot for now.
But for investors at this point there are two major points to consider. The first is that things might get worse. The Dow Jones Index fell to 8,000 in 2008. Yet, even after the recent drastic falls it’s still trading at just over 21,000 as at the time of writing [18 March 2020]. That’s more than 250% higher than the lows of the great financial crisis, and shows that while there is real alarm out there, fear of a systemic failure of the kind that was contemplated in 2008 is largely lacking.
Governments are pumping in stimulus in any shape and form they can come up with, and although monetary policy was already loose to unprecedented degree, it’s going to get a lot looser yet.
Who will pay? The answer, of course, is future generations. Bond yields may be moving around, but interest rates are lower than ever, which means government borrowing has never looked more viable or, to some eyes at least, desirable.
In the UK, Boris Johnson’s government has already marked itself out as one that’s willing to spend in a way previous conservative government’s haven’t. President Trump’s talk of helicopter money shows that he too is quite prepared to open the taps.
Whatever other mistakes are being made, a repeat of the Fed’s errors in the 1930s isn’t likely. This will be one big slump, rather than a yo-yo ride, whatever contrary impression the daily volatility numbers give.
Which brings us back to markets.
There will be winners and losers, of course. There always are. Amazon (NASDAQ:AMZN), for example, will be shipping into more homes than ever. In the US, it’s concentrating on medical supplies for now, but that only goes to show how big the volume of its business really is. Its shares have fallen too, of course, but note that they have nearly made up all the ground lost over the past week, and that they are still trading higher than they were for much of the third quarter of last year. Amazon shares are currently worth more than 350% more than they were five years ago, allowing for the recent falls.
Another winner might be the gold sector, which often benefits in times of uncertainty. The gold price has taken a bit of a trouncing in recent weeks, but expect that to change. Any buyers who came into gold between at any time over the past five years other than in the first months of this year is still sitting on a tidy gain, which is why there’s been so much selling. Once that selling abates, the old safe-haven mentality will reassert itself, and gold will come back into fashion.
Gold equities will rise too, although how much is open to question. After all, in spite of some sharp recent falls, the big gold proxy, Barrick Gold (NYSE:GOLD)(TSE:ABX), is trading broadly flat on levels it has been at since the end of last summer. So don’t expect the gains to be out of this world when the market starts buying back in.
Finally, although the FTSE is at a five-year low, at just over 5,000 it’s still trading over 1,200 points above the nadir reached in 2008. Could it go that low again? Very possibly, but back then the financial system was unravelling on its own. This time, the economic unwinding is largely deliberate. The human race has the power to pare the financial losses when it chooses. It’s just a question of working out what levels of other kinds of losses it chooses to bear.