The Week that Shook the World

Panic. Complete panic gripped global financial markets on Monday, March 9, following two weeks of growing anxiety over the economic impact of the novel coronavirus known as COVID-19. Within four minutes of the New York Stock Exchange’s opening bell, stock prices collapsed, triggering a circuit breaker—a 15-minute halt to trading—for the first time in 23 years.

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The trading pause, though, failed to calm the frenetic rush for the exit door out of stocks. By the close, the Dow Jones Industrial Average had plummeted 7.8 percent and the S&P 500 was off 7.6 percent. That would be only the beginning of the week’s wild ride. Three days later, the stock market fell off another cliff, the Dow losing a record 2,352 points, 10 percent, and the S&P down 9.5 percent. Though stocks rebounded on Friday the 13th (of all days), billions of dollars in stock market wealth still vanished by the end of the dizzying week. 

Stunning as the virus-induced crash was, it was not unique. Anyone with a sense of investing history understands this is the kind of volatility that has occurred before in the stock market. On Black Monday, October 19, 1987, a day I covered at the New York Stock Exchange as a young reporter, the S&P lost 20.5 percent. In 2008, stocks tanked nearly nine percent on two separate days. During the Great Crash of 1929, the S&P 500 plunged 13 percent on October 28 and then another 10 percent on October 29.

Panic is a very human emotion. Given that humans make buy and sell decisions— or at least program them into computers—financial markets do trade off of emotion. Consequently, every so often, panic will take control of markets. 

It’s not entirely irrational. This is because investors buy stocks based upon anticipated earnings. When prices are bid higher, investors expect earnings will rise. But, when they are uncertain about the future stream of earnings, they flee such risk assets and seek safe havens such as gold.  

This is precisely what the novel coronavirus has done to financial markets. The coronavirus first appeared to be isolated to China.  But then it spread to Italy, South Korea and Iran. Now it is a global threat, a genuine pandemic. What initially seemed to be a temporary disruption in Chinese factory production, has since slammed the brakes on the global economy. Companies have halted travel; trade groups have cancelled conventions; managers have told employees to work from home; universities have shuttered; sports arenas and theatres have gone dark. In the coming weeks, retailers will fail to receive shipments due to supplier shutdowns overseas; factory supply pipelines will run dry, and businesses will suffer real damage. Even worse, from an investor’s perspective, no one knows how bad it’s going to get—how far the coronavirus will spread, how many companies will be on lockdown, how long before it’s back to business as usual. The near-term future is highly uncertain, and there is nothing investors hate more than uncertainty.

What we do know is that financial markets are forecasting a growing likelihood of recession. Indeed, the bond market has been predicting this for months as short-term interest rates repeatedly topped long-term rates, a rate inversion that has been a reliable predictor of recession.

Add to this, Saudi Arabia’s decision to cut oil prices in response to Russia’s refusal to reduce production. The battle between oil producers will be devastating to the global energy business, which had already been mired in a severe slump.

The carnage of the March selloff reminds us just how volatile investment assets can be, even relatively conservative holdings such as shares in blue chip utilities. This is why it is essential for any prudent investor to hold a diversified portfolio, one that includes not only stocks, but also bonds, cash, and hard assets, like precious metals that can maintain their value, and even rise, when panicked investors are throwing stocks out the window.

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