FYI | Mar 24 2020
By Peter Switzer, Switzer Report
The case for closing down the stock market
The only people who wouldn't like what I'm about to propose, that is, to shut down the stock market, are those who are making huge profits out of the Coronavirus stock market crash. But don't let this be seen as sour grapes because I'm losing money. It's more the case that if they're locking down non-essential businesses, then they are stopping the normal running of commerce or the economy, and so how fair is it to keep the business of the stock market open?
If I stayed in a market too long because I was greedy, ignoring the traditional signs of an overheated stock market, then I'd deserve to lose money when stock prices head south. However, under these conditions, the kind of stimulus packages that the likes of Britain, Canada, New Zealand, China, and now us, would have resulted in a slowing up of the fall in stock prices, but, as I write, the S&P/ASX 200 Index is down 5.68%.
So why is this happening?
It's simple the Government is closing down businesses that are totally outside normal conditions because this damn virus has delivered extraordinary times, which has led to the Treasurer telling us it requires extraordinary policies.
Yep, an Australian Government throwing $189 billion or 9.7% of GDP at the economy and promising to close down non-essential businesses, including the great Aussie institution called "the pub" are examples of that!
If we can close pubs, cafes, and Victoria has closed schools, then we should cash in on extraordinary times by simply closing the stock market!
Governments have changed the rules of business for good health reasons and there is no reason why the stock market (which on one level is like the TAB for company punters in the short term) can't be put on hold until we see what happens to the infection and death rates in Europe, the USA, here and the rest of the world.
I know it's a big call but these are extraordinary times and extraordinary actions are justified.
That's what I'd like. And while it could hurt some people who might want to go to cash in the next three to four weeks, if the virus can be contained inside that time, then stocks could roar out of a time-out of action' period via a market closure.
If authorities aren't prepared to do this, I expect markets will keep falling, though fund managers and brave investors who'll be taking 6 to 12 month views, will be buying at low levels, waiting for some better Coronavirus containment statistics to send the market up in a huge spike!
I'm content to wait for that but I know others could find that hard to stomach. That said, you have to be careful of going to cash and missing the rebound in stock prices. It could mean that you miss out on the way down and on the way up.
Not helping the current market malaise is the slowness of the US to kick off a stimulus package and the Yanks are no strangers to policy procrastination.
On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection and it took the Yanks until February to pass The American Recovery and Reinvestment Act.
This rescue operation cut taxes, boosted unemployment benefits and allocated $275 billion in federal contracts, grants, and loans. Consumers, small businesses and key businesses such as banks, automakers and so on were targeted to ensure jobs were created.
It was a good programme, albeit delivered too late.
And how did the stock market react?
Dow Jones Industrial Average
The slide to the right of the 5 Jan 2007 market is the 50% crash of the stock market. And the rebound that followed started in March 2008 that was one month after the US outlined its stimulus package.
Between early March 2008 and early January 2009, the Dow rocketed up around 37% and it was all uphill from there.
Right now, stock markets are awaiting two important events:
First, the reduction in the growth rate of infections in deaths in Europe, the USA, here and the rest of the world.
Second, the US stimulus package that could and hopefully will come in at 10% of GDP, or around US$2 trillion!
Larry Kudlow, economic adviser to President Trump, told reporters it could top $2 trillion.
"The package is coming in about 10% of GDP, it's a very large package," Kudlow, the director of the National Economic Council, said. Ten percent of gross domestic product is roughly $2 trillion."
The Democrats are being accused of obstructing the package because they say it's too pro-corporate but you have to hope that something emerges this week to help stocks.
And then you have to pray that the improved infection/death stats kick in ASAP.
China first reported evidence of a Coronavirus to WHO on 31 December last year. By March 7, China's Health Commission reported 99 new cases, down from 143 cases the day before, with a total of 80,651 cases nationwide. That was 10 weeks from start to falling stats. Not long after, reports that China was getting back to normal started to grab the headlines.
You have to hope that a 10-week period of the Coronavirus doing its worst becomes the enduring story.
If that's the case, stocks will roar back, driven by the optimism of a reducing Coronavirus threat and a pipeline of global fiscal stimulus designed to help economies for six months.
I know I've said in the past that hope isn't a strategy, but when it comes to a pandemic emergency that is overwhelming economies and stock markets, we have to have high hopes!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
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