March 16, 2020
There is great concern at present around the possible spread of Coronavirus. Whilst there are genuine issues that will need to be addressed by governments and businesses in order to manage the spread, it is also causing a significant level of anxiety for many investors. This fear has come on extremely quickly with the majority of recent falls occurring in the past three weeks.
At the time of writing, world share markets have dropped as follows from their peak:
World Share Market Drops
As the above shows, Australia has currently fallen by 24% and some European countries have fallen by over 30%. Interestingly, China has only dropped by 7% despite being the worst affected with over 2/3 of all confirmed cases. This suggests that the fear of the virus may be worse than the actual virus itself.
What is most unusual about this downturn is the speed at which the markets are reacting. In the case of the 2008 Global Financial Crisis, the markets took 10 months to fall by the same amount as they have fallen in 3 weeks this time. This suggests that it is likely to be a more intense period with falls occurring quickly, but markets are also likely to reach a bottom and begin recovery much more quickly as well.
The chart below shows the historical performance of the Australian share market since 1980. What is notable is that the markets are now at a level that is considered quite oversold from a historical perspective, which hasn’t been seen since 1982. This suggests that, whilst the markets may not have yet reached their absolute bottom, we are likely to be getting very close to it. The five-year period following 1982 turned out to be the best 5 years that Australian shares have ever experience. This is why it pays to stay disciplined and not sell during the difficult times.
Whilst no two periods are exactly alike and there is no crystal ball to know exactly how things will happen, I expect that the current fear of the unknown (the same fear causing people to stockpile toilet paper) will inevitably give way to better and more informed decisions. If businesses are still around to sell us groceries, petrol, mobile phones, banking and electricity, markets will undoubtedly recover as well.