Global Stock Market Crash

In my last blog on the 5th March I explained the market rally may be a “dead cat bounce,” jargon used to describe a temporary increase in a stock or index in an otherwise falling market. The rally appears to have life in it but it proves to be an illusion as prices subsequently continue to fall. So it proved. A month ago on 12/2/20 the FTSE 100 stood at 7,534. Yesterday it closed at 5,237 a fall of 2,297 points or a whopping 30.48%. This morning however the FTSE 100 is up 6.45% as I write. Similarly the Dow Jones Industrial Average fell from 29,551 on 12/2/20 to 21,200 yesterday, a fall of 28.25%.

Yesterday was especially savage. The FTSE 100 fell 10.9%, the worst daily plunge since 20/10/87, so called Black Monday when the FTSE 100 fell 12.2%. The Dow dropped 9.99% yesterday whilst European indices were hit even harder with 12% falls in Germany and France and 17% in Italy. These are the worst daily falls in the 29 years I have been a financial adviser and worse than during the bursting of the technology bubble in the early noughties and the global financial crisis in 2008. The only crumb of comfort is the hit to the global economy from the Coronavirus appears to me to be less of a systemic threat. The technology bubble was created by the market setting absurd valuations on businesses with no earnings. This all proved to be an illusion and like a house of cards and the market crashed. In contrast prior to the Coronavirus pandemic company earnings and earnings growth were reasonably solid and valuations generally justified in most markets.

The global financial crisis was due to bank’s excessive debt, weak balance sheets and poor liquidity. Today the banks are much better capitalised and the global financial system seems OK. What the markets are therefore reacting to currently is the inevitable hit to the global economy. Trade and economic growth will slow and some countries will go into recession, however orders and demand will remain and back-up until the crisis passes. In some sectors at least there will be a post-crisis surge, although the lull if prolonged and sharp will lead to job losses and business failures. Cue government support.

If I am right about the low level of systemic risk the question is what happens when the pandemic wanes and ends? Logically if the markets were right on stock valuations prior to the crisis you would expect a sharp rally in prices after the crisis– a rubber ball bounce! That said there is no other way of putting it, your portfolio valuation currently looks awful. However unless you are invested 100% in equities your portfolio would not have fallen as much as the 30% drop in the FTSE 100 index in the last month. Many of my clients hold multi-asset, bond and other cautious risk funds or gold and these investments would have cushioned the falls to some degree.

The other point to make is the depressed values of your holdings and losses are paper figures. They only become real losses if you crystallise them by selling out at current prices. It would be the worst thing you could do and if you have retained a sufficient cash reserve you should not need to be a forced seller. Even if you must sell funds due to an immediate requirement for money selling defensive investments will cap losses. For the brave now may be an excellent time to invest cash. If you are thinking about ISA contributions for 2019/20 you will certainly buy at low prices. For most investors however the advice is as repetitive as that about hand-washing – do nothing, stay invested for the long term and wait patiently for the recovery.

The content of this blog is based on my own understanding of global stock markets.  It reflects my personal views and is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to invest cash tactically. You should seek individual advice based on your own financial circumstances before making investment decisions.