The new epidemic of the century is the coronavirus (COVID-19). This virus was discovered in China in Wuhan on December 31, 2019. The symptoms are fever, cough, shortness of breath, and difficulty breathing. This virus can cause pneumonia, severe acute respiratory syndrome, kidney failure and death. The World Health Organization (WHO) announced on January 30 that the new epidemic of coronavirus is a public health emergency of international concern. As of March 9, 2020, 105 countries have been affected by COVID19, which counts 113,585 confirmed cases, 3,996 dead and 62,517 people cured. The countries most affected by the virus are China, Italy and Iran. The mondial population is scared by this virus because it is spreading very quickly which impacts the stock market.
The history of epidemics on the stock market
The coronavirus is not the first epidemic crisis. Indeed, during the past 40 years, there have been 12 global epidemics and 6 declarations of international public health emergencies (UPSI) by the WHO since this declaration was adopted following the SARS epidemic in 2003.
Figure 1. The 6-month global yield of the index according to different epidemics. Source : GLC, 2020
Figure 1 shows a trend in the performance of the global index in times of crisis. Indeed, at the start of each epidemic, the markets fell with a fall in stock prices and an increase in bond and gold prices. The stock markets recover after 6 to 12 months. This can be explained by the investors’ decision. At the start of each new epidemic, they base their decision on fear. Once the lowest peak has passed, the massive liquidation slows down and investors rely on fundamental analysis again.
Currently in the media and in the public, it is possible to feel an increased fear of the coronavirus. In fact, hospitals are preparing to receive patients with the virus, governments are placing quarantines on people who are contagious, and there are travel restrictions in some countries. This fear directly impacts the global economy and the stock markets. Indeed, the stock market has dropped as shown in Figure 1 (yellow line) and there is an increase in volatility. As explained in the previous section, markets can stabilize only when there are no more increases in new COVID-19 cases and no more fear. Throughout the crisis, volatility will be high, but stocks will not necessarily drop. When there are signs of improvements such as the virus will not spread as quickly as it does now, it is possible to expect a turnaround. Therefore, the lowest stocks currently (eg stocks in emerging markets, airlines and oil and copper related sectors) will experience a recovery.
The effects of the coronavirus on today’s economy
Since the massive spread of the coronavirus, several changes have been noted in the global economy. In fact, on March 4, the Bank of Canada announced a drop in the interest rate from 1.75% to 1.25%. As for the Federal Reserve of the United States, the day before, they also announced a drop in its percentage of its key rate to cushion the economic impact of the coronavirus. This virus has disrupted supply chains. This is the first rate cut since summer 2015.
As for the S&P500 stock market index, it fell by 7.6% to 2,746.56 points as of March 9, 2020. This corresponds to the lowest drop since the economic crisis in 2008. As for the index the Dow Jones Industrial Average, it fell by 7.79% which also represents the lowest variation since October 15, 2008 when the fall was 7.87%. In addition, on the same day, oil prices fell by about 25% in New York and London after the discussion failure between Russia and Saudi Arabia. Indeed, Russia, which is classified as the second world producer of oil, refused a reduction in production of 1.5 million barrels per day in order to reduce oil prices. This drove Saudi Arabia to lower the price of its black gold and to increase its production due to fears of the coronavirus on economic activity. In addition, the Toronto Stock Exchange (TSX) dropped by 10.3%. This has, also, impacted the energy sector which fell by more than 20%.
This same drop phenomenon can be observed on stock market indices in Europe due to the oil crash and the economic fear due to COVID-19 (see Figure 2). Only US and German sovereign bonds are benefiting from the drop, as ten-year interest rates are at an all-time low.
Figure 2. A comparative graph of stock market indices from different countries (Canada, United States, France, United Kingdom and Germany) for the last 3 months from December 9, 2019 to March 9, 2020
Source: zonebourse, 2020.
Tips for investing during a crisis
The GLC Asset Management Group is a Canadian investment management company with over $ 55 Billion in Assets. They propose 5 Tips for investing during a crisis to maintain a healthy investment strategy and to counter emotion investment.
- Do not panic.
Emotionally driven decision making is often impulsive and excessive, and it can affect long-term value creation.
- Take advantage of the added value through active portfolio management.
It’s time to jump on good buying opportunities.
- Work with your financial security advisor.
In periods of high volatility, it is important to determine your risk tolerance, the timing of your investment objectives and your overall financial program in order to maintain your objectives that you have set.
- Have a plan for times like this.
Take advantage of current experience to see how market volatility affects your investment.
- Find a reliable and clear resource to understand the market.
Be wary of bad information that fuels fear.
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Featured image : Realtor, 2020