Just ten days ago Donald Trump tweeted “Highest Stock Market in History, By Far!” It isn’t any more. So with an election coming in November, the US president now wants your help getting the indices back to record territory. Buy the dip, he says.
You might think that’s perfectly reasonable – after the worst week for markets since 2008, equities could indeed look, as Trump suggests, “very good”. After all, this has been one of the greatest of bull markets: global equities have given the brave a near 300% return since 2009. While there have been naysayers galore along the way, me included, the end never seems to come.
Last time Trump told you to buy the dip, in 2018, he was absolutely right. But look a bit closer and you might not feel so confident. There are two nasty routes to economic disruption from the coronavirus outbreak. The first is the demand side: the falls in global equity markets have been led by the obvious victims – airlines, airports, cruise companies, hotels and luxury goods companies. The Chinese provide a third of luxury sector revenues and they aren’t buying.
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The second source of trouble is supply: modern supply chains are complicated and only as strong as their weakest link. If you can’t get one part, you don’t have a car. So it matters that TS Lombard estimates that only 35% of Chinese workers were on the job in mid February. Even now, employers are struggling to rebuild their migrant workforces. You rarely see global supply and demand shocks at exactly the same time, but you’ve got that now.
Central banks may not be able to stimulate their way out of this one
The main reason markets have done so well over the past decade is extraordinary monetary policy support. When interest rates go down, asset prices go up. Whenever markets have felt a little tired, a hint or a headline that there is more easing to come has pepped them right back up. Trump presumably figures that what central banks have done before – “whatever it takes” – they can do again.
But potential pandemics don’t care if you cut interest rates. Respiratory infections don’t care about quantitative easing. The average Covid-19 virus won’t cheer up and pop out for a new car, however excellent the terms you offer it.
Central banks promising stimulus may not make much of a difference this time. Loose monetary policy might help companies temporarily weather the storm, but it cannot fix broken supply chains or get people on lockdown to buy Hermès handbags.
A headline suggesting a fall in interest rates is coming cannot compete with Thursday’s news that all schools in Japan are to close, or Israel’s advice to citizens on Wednesday to avoid all foreign travel. Imagine the potential reaction to an outbreak in a major US city.
The behaviour of public health authorities is not reassuring. A family member of mine who feels a little snivelly after an Italian ski trip is waiting for test results. While he does, his kids have been told to attend school and no one has suggested that the rest of the family should curtail their trips to the pub. Containment? Not really.
The key point here is that monetary policy can’t help with the medical risks of the virus; it can’t mitigate the obvious supply and demand risks; and it can’t manage government responses.
Valuations are high and markets are vulnerable to any sort of shock
All is not lost, of course. It is entirely possible that nature will come to our rescue. Maybe, as the spring comes, the virus will disappear and supply chains will normalise, while pent up demand and a nice wave of stimulus will provide fuel for a renewed bull market. Hong Kong is giving residents hit by the virus HK$10,000 ($1,280) to spend.
But the global economy was already looking a bit ropey after decelerating Chinese growth and record levels of global debt. That makes it vulnerable to shocks that would be minor if valuations were low across the board. But valuations are not low.
Brokers can always find a way to argue that, overall, global markets aren’t hugely overpriced. However, some segments are very expensive even after the 10%-plus falls this week, among them growth stocks, a lot of technology and bond proxies. Much of the US market has long been priced for perfection rather than pandemic. Many investors have been nervous – even waiting for an excuse to sell – for some time. Now they have that excuse and they are using it.
So buy on the dip if you are convinced that the virus will be contained and that supply chains and behaviour will soon go back to “normal”. You must also brush off the rising evidence that globalisation has an awful lot of thoroughly unpleasant downsides and be sure that markets entered this non-financial crisis fairly priced.
If you have any doubts, you might want to leave buying into corona capitulation to Trump. He at least can afford it.
• This article was first published in the Financial Times
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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