Coronavirus: will the markets fall further?

    4 March 2020

    On Monday morning – the day that the US stock market was to rise five percent, the biggest one day rise since 2009 – I received an email from an investment firm asking: is now the time to be buying into the coronavirus dip? The gist of the answer was no. It was still far too early. Markets could still slide far further. Better to sit on your hands and wait until the position is clearer.

    Well, yes, markets could indeed fall further. Monday’s rebound could be just a ‘suckers’ rally’, drawing in bargain-hunters who can then only watch as their shares become even more of a bargain. On the other hand, when the position with coronavirus is clearer, markets could be higher and you would have lost the opportunity to buy at a sharp discount. This week has been a reminder of how the sharpest falls in the stock market are often followed by the sharpest gains. Look at the real pits in the markets over the past 40 years: the Black Monday crash of 1987, the rout of 2003 and the financial crisis of 2009: in each case the bottom was marked by a distinct ‘V’, in which the market rebounded just as quickly as it rose.  One struggles to find a stock market crash where, in the final act, after a precipitous fall, prices remained at rock bottom for a few weeks just so that investors could wait for good economic news to filter through and so be sure that the bottom had been reached.  

     And yet, at each market nadir, there were people who continued to insist that it was too early to consider buying shares: they could still fall far further.  Of course there were: that is how markets work. Whatever the level of a market there will always be people on either side: those who think it will go up and those who think it will fall.   That is what sets prices: you will never have share prices which everyone thinks are too cheap, nor those which everyone thinks are too expensive.

     In the long run, no-one ever went far wrong by buying into the big dips in the market. Had you bought into the false bottoms of the market in 2002 or 2008 you would have been showing paper losses several months later. But had you held on you would not be regretting your decision now – you would be sitting on very substantial profits.

    We can’t know for sure if the markets will fall further. Health secretary Matt Hancock has outlined a worst-case scenario where 80 percent of the UK population fall ill with coronavirus. But there are signs that coronavirus fears have been hugely overplayed.  Before I check stock prices each morning I first check the ‘situation reports’ of the World Health Organisation, which give a daily total for the number of new cases identified. They reveal that the highest rate of infections so far was in the week ending 15 February, when a couple of thousand cases or more per day were being diagnosed. Now, diagnoses in China have fallen back to 300-400 a day. While they have risen outside China, overall global rates have not reached the level they were in the second week of February.

     Of course, this may be a false dawn; there could be a second deadly wave. Even without it, there will still be bad economic news to come. But to me, last week’s stock market panic speaks a little more or opportunity than doom – especially in those industries, such as airlines, where falls have been hardest. Coronavirus has given capitalism a slight fever but it isn’t going to kill it.