FYI | Apr 21 2020
By Peter Switzer, Switzer Report
Will I be damned if I do or damned if I don’t? These are the big questions we all have to face in working out if we start loading up on stocks for tomorrow — or do we wait for another leg down?
I don’t know the answer but it’s my job to have an informed opinion on the subject. I’ve never had to do the numbers on a virus, its infection and death rates and the likelihood of it coming again in a second wave. And would a plethora of treatment processes do the trick or do we really have to wait for a miracle vaccine?
Overlaying all these basic questions is: how will social restrictions ease in and will they bring earlier-than-expected stimulus to the economy? Or will they backfire, forcing the re-instigation of tough lockdown regulations?
As countries around the world from Austria to Denmark to Germany start easing restrictions (even the Kiwis set their sights on less lockdowns), we have the biggest test for a surprisingly optimistic stock market — the US being opened for business soon!
More on this make-or-break decision for the stock market later.
In its morning briefing note, NAB explained why the US stock market continued to rally on Friday:
“Optimism continued on Friday with talk of further containment rollback, while leaked results of successful trials of Gilead’s Remdesivir and Roche looking to release antibody testing kits also helped,” it explained. “China’s industrial production for March also added to views that a strong bounce back could be likely, following the lifting of containment measures – production +32.1% m/m after falling -24.9% in February.”
On back of the envelope calculations, the S&P 500 has rebounded 28% after a 34% slump, which means overall the Coronavirus and its containment policies have cost US investors only 15%!
In contrast, our S&P/ASX 200 has lost 23%, despite our infection and death rates being miles better than the Yanks.
Obviously, being heavily dependent on bank stocks, our stock market index has been hurt and these organisations have been asked to shoulder a big part of the rescue programme. Also, lower rates of interest and an economy in recession is bad for banks and the ‘edict’ to reduce dividends from the regulator hasn’t helped.
Also, the Government decision to let super members access up to $20,000 worth of super has put pressure on super funds to liquify assets and that has to mean selling shares. Today’s AFR says Hostplus is seeking to take out “$1.5 billion from one of the country’s biggest property investment funds ahead of what could be an avalanche of requests by out-of-work hospitality and tourism workers for early access to their retirement savings.”
That said, we have rebounded 20% after a 33% fall, showing that the uncertainty of the initial Coronavirus sell off has been partly addressed by the huge local stimulus package and the combined muscle of the RBA and the supporting banks that are giving six-month loan deferrals. An estimated $339,485 million or around 17% of GDP has been pledged by Australian governments to help the country deal with the virus crisis, which is huge by international standards.
But as I’ve already suggested, the missing pieces in the “should I invest” puzzle are all health related:
- Will virus data expedite the easing of restrictions and lockdowns?
- Will a second wave force us back to lockdowns and closures again?
- Will a treatment help us get back to normal?
- Will a vaccine be essential for normalcy in the economy?
These aren’t easy questions to answer by medical experts, let alone economist/markets commentators who often rely on history and trends to guess the future. And the history of stocks during the Spanish Flu is intriguing.
Dow Jones Industrial Average (1915-1922)
Source: Macrotrends.net
Note how the Dow rose in the flu years of 1918 and 1919 but was bear-like in 1920 before roaring back in 1921 and into a decade called the Roaring 20s.
Morgan’s chief economist, Michael Knox thinks we could be facing a rerun of the Roaring 20s this century. And look at how the Aussie stock market performed over the period.
Source: MacrotreOur
Our stock market didn’t have a negative year over that time, though the economy wasn’t hampered by lockdowns and closures.
This chart also shows how stock markets recover from serious viral threats:
Of course, none of this tells us that there won’t be another leg down — and that’s what you want to know.
Hand on heart, I think another leg down is likely, as some surprise bad news meets profit-takers and hedge fund managers, who love to exploit fear and loathing. But provided we don’t have the threat of a second wave, the drop will be less than the first Coronavirus crash.
I hope I’m wrong but when it comes to pandemics and threats like COVID-19, we are flying blind and simply hoping that the worst is behind us.
However, as I’ve long argued, hope is not a strategy!
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).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
