Peter Brown: With this virus, no one can predict where stocks are heading

Peter Brown: With this virus, no one can predict where stocks are heading

‘Up the escalator, and down the lift’, is the old stock market adage that remains all too relevant.

The ‘up’ bit had lasted for the past nine years when stock markets had made huge strides, but in a very steady fashion.

A slow climb up meant that markets rose most days, and the reasons were not hard to find.

The recovery from the global banking crash in 2008 amid rock-bottom interest rates around the world has been very good for stock markets.

The market had climbed as money poured into company stocks and as central banks printed money to try to boost economic growth.

Peter Brown: With this virus, no one can predict where stocks are heading

One consequence has been overinflated prices in some areas of the stock market, leaving them vulnerable to a correction.

Nonetheless, market corrections since 2009 have been short-lived.

The oil crisis in 2015 and hikes to US interest rates in late 2018 were also scary signals for investors to sell up. Yet, the market
recovered strongly on both occasions and went on to reach new all-time highs.

And anyone who got out of shares or sold part of their holdings soon regretted it.

But the enduring problem is that bear markets jump out to catch investors unawares.

Investors lose their gains which have been built up over months, in a couple of days.

We saw that in recent days when Wall Street shed 2,000 points in a few days.

The last week or so has provided an example of the truth of the ‘up the escalator and down the lift’ saying.

Despite the huge sell-offs, stock markets remained at historically elevated levels last week, amid growing fears of the economic fallout of the coronavirus.

Fund managers need strong arguments to take their clients out of stocks.

A bit of bad news and a 10% correction, as happened last week, was not enough to do it.

Selling when stock markets shed gains very quickly has proved to be a foolish strategy in the past.

Indeed, clients would get very annoyed to be holding cash if soon after, stock markets were to recover and go on to post new all-time high levels

That means that every time there is a correction, there is much advice urging investors to buy more stocks

The scenario in which a fund manager recommends liquidating a client’s portfolio is when there is likely to be a fall of around 20% and when stock markets are likely to remain in a bear market territory for a number of years.

For that analysis to come true, the prospect of a global recession would have to loom large. Or maybe, US investors are also moving prices to take account of the policy shakeup should Bernie Sanders be elected as the next US president.

Whether the coronavirus is serious enough to cause a global recession will have to be weighed. A global slowdown is a certainty but that will usher in even lower interest rates — just look at the yield on the Irish Government 10-year bond, at minus-20 basis points, a historic low.

Germany likewise, at minus 50 basis points, signals there will be a slowdown in global economic growth.

Mr Sanders winning in the US is a very different matter. His pledge to forgive all student debt, if implemented, would send shock waves through the financial markets.

The heavy selling on stock markets in recent days may also have to do with his story too.

Joe Biden winning over the weekend in South Carolina may provide some relief to investors, while the Democratic nomination trail on ‘Super Tuesday’ will go a long way to deciding who will compete against Donald Trump.

The market will be very focused on the outcome.

On the virus, investors need to know where the virus is heading.

If it lasts as long as the Sars outbreak, the latest coronavirus will turn into a pandemic to hit supply chains globally.

No one can predict the outcome with certainty, at this time. What is clear is that some businesses, and
indeed company stocks, will be badly hit.

That requires an active investment manager to look through your investments to identify your risk.

Negative-yielding government bonds are not safe in any good portfolio: They destroy returns

In the US, the S&P 500 is seriously overvalued, as is the dollar. But for now, investors in stock markets need to watch and wait.

Peter Brown is founder of Baggot Investment Partners at pbrown@baggot.ie

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