Wipeout or Opportunity? — The Stock Market Crash
Whew, it’s ugly out this morning.
The markets are a sea of red and the headlines are a tad dramatic.
‘ASX drops as coronavirus concern spreads’ screams the Australian Financial Review this morning.
Underneath that is a headline that says: ‘Dow sheds 1,000 points amid global sell-off’.
The Australian is a fairly similar vibe.
Over at The Age, their headline article reads: ‘ASX falls 2.25 per cent on opening, sheds $47.3 billion’.
Is this it? Is it here? Is this the stock market crash everyone says is just around the corner…
Overnight the Dow did fall 1,000 points — about 3.5% for the day’s trading. The S&P500 was down 111 points, but that equates to a 3.35% fall. The tech-heavy Nasdaq took the biggest hit, losing 3.7%.
Yes, these are pretty big falls for a day’s trading session.
And it’s no surprise that gold peaked at US$1,690 while we were sleeping. Although it’s settled back down to US$1,660 now.
Here’s the thing with headlines, they are great at getting your attention. And things sound even worse when you chuck a billion dollar value on it.
The problem is, it doesn’t inform you about what’s going on, you just know that the markets are panicking…
Is it time to panic?
In short, no.
When the market takes a hit like this, it can be really hard to control an itchy trigger finger.
Dumping stocks when the market is selling off isn’t always the answer. It’s why being prepared, and looking beyond mainstream rhetoric, is critical when it comes to investing.
In saying that, readers of the Daily Reckoning Australia will know that Jim and I have discussed the impact of the coronavirus on stock markets over the last couple of weeks.
Both of us have been surprised that markets have been at all-time highs in spite of the potential impact of the flu on global trade.
As I wrote here just two weeks ago, commodity markets are looking pretty wobbly as they react to a closed-up China, whereas stocks weren’t.
Throughout these pages, Jim has written he suspected the bug not only hadn’t been contained properly, but was likely far worse than Beijing authorities had let on.
And yesterday we got a glimpse of that.
Today the papers declare that Europe is in lockdown.
There’s over 200 confirmed cases in Italy, and the government is being pressured to supress ‘free movement’ between countries.
To boot, there’s little in the way of commodities or goods being shipped into China, and even less being shipped out.
And accusations are flying about how the World Health Organization handled it. Telling the public the threat was contained, in spite of never visiting Wuhan directly.
Markets are throwing a tantrum today. I bet there’ll be more down days for the rest of the week too.
But what are we really witnessing? That very subject was in hot debate here at the Fat Tail Media office yesterday.
At a minimum it’s failure of a totalitarian government.
At the worst, it’s a breakdown of globalisation, destruction of trade, and freedom of movement.
We’ll chew on that tomorrow.
Now it’s over to Jim.
Until next time,
COVID-19, Not Over by a Long Shot
Are you tired of hearing about the coronavirus? Well, you shouldn’t be because it’s a serious situation with global consequences.
Markets have been following the spread of the coronavirus (COVID-19) closely for good reason.
The Chinese economy, second largest in the world, is shutting down in stages. In affected areas, streets are empty, stores are closed, planes and trains are not running.
Over 60 million people are ‘locked down’, which means they are confined to their homes and can only leave once every three days to buy groceries (if they can find any due to hoarding).
The effects go far beyond China because of global supply chains.
If Chinese factories are closed, they are not buying components from South Korea, Japan, and Germany. Likewise, if Chinese factories are closed, they cannot supply finished goods to US buyers.
The result is that factories and sales are also slowing in developed economies…
What we knew was wrong
Until this week, markets were taking a measured view. Some epidemic models showed the disease would peak in April 2020 and tail off quickly from there.
The other assumption was that any dip in the Chinese economy would be made up later in the year so that the total impact would be minimal when viewed on an annual basis.
All of those assumptions were blown up in a matter of minutes in the late evening of Wednesday, 12 February.
In a single update, 14,840 new infections were reported, moving the total from 45,000 to about 60,000 cases.
This did not mean that 14,840 people were infected in one day.
It meant that China suddenly became more transparent and decided to include existing cases using more valid diagnostic criteria.
But the change did move the official statistics closer to the amount shown in a leak on Tencent (that showed about 150,000 infections) and a Lancet (a preeminent medical journal) model-based input that also estimated about 150,000 cases.
Officially, China has reported 118 new deaths, bringing the number of (official) deaths nationwide to at 2,236.
China has also reported 1,109 new confirmed cases, dramatically up from 349 cases the previous day.
And now, for the third time in eight days and the second time in 24 hours, Chinese officials made changes to how they count coronavirus cases.
When asked if he thought the virus will be contained, World Health Organization director Tedros Adhanom Ghebreyesus said:
‘The window of opportunity is narrowing, so we need to act quickly before it closes completely.’
The bottom line is that the Coronavirus is worse than Wall Street believed, the economic damage is greater, and it will take longer to get the disease under control.
Stock prices fell after the news was reported.
As more bad news dribbles out, that stock price adjustment has further to fall. From here, the question is how much lower? Only time and data will tell us.
All the best,
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