Donald Trump says “buy the dip” – but is now really a good time to invest?

After the worst week for markets since 2008, Donald Trump thinks equities look “very good”. But if you’re thinking of buying, says Merryn Somerset Webb, be careful.

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.

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

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
The new social-care levy: an unfair tax that protects the “assetocracy”
National Insurance

The new social-care levy: an unfair tax that protects the “assetocracy”

The government’s regressive social-care levy will make Britain’s tax system even more complex. Root-and-branch reform is long overdue.
18 Sep 2021
Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos
Bitcoin & crypto

Cryptocurrency roundup: litecoin blunder, cardano update and bitcoin mining in Laos

Saloni Sardana looks at the week’s biggest stories in the world of cryptocurrencies.
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021