Buckle up – there’s a lot more financial market turbulence to come

Markets are having another bad day. And while investors feel the worst effects of coronavirus haven’t been priced in, that will continue. John Stepek explains what’s going on and what it means for you.

Poor old Rishi Sunak. There he is, enjoying a moment in the spotlight, and arguably doing a pretty good job of it. Then the coronavirus and Donald Trump’s latest panicky pronouncement on the topic whip the carpet from beneath him, and thus today’s Money Morning is all about corona rather than the Budget...

Markets are having another bruising day. The specific catalyst today is Donald Trump’s somewhat garbled and last-minute decision to shut the US to passenger air traffic from Europe (excluding, it seems, the UK, Ireland and possibly Cyprus).

Donald Trump’s presentation skills suddenly matter

As the bit in brackets suggests, Trump’s messaging wasn’t all that clear. At first, it sounded as though he was shutting off trade as well, which would have been even more drastic. He also made confusing comments about who would pay for coronavirus treatment, which were then contradicted by a healthcare lobby group in the US.

Basically, he sounded incompetent. And for perhaps the first time in his presidency, that actually mattered. As one fund manager commented to Bloomberg: “Investors are looking for bold government stimulus. So far we haven’t seen a lot of detail and there isn’t much confidence it will happen quick enough.”

I’ve had a lot of conversations on Twitter about whether or not governments should be stepping in to “do something” about all this. It’s an interesting ideological debate. But when it comes to investing, it’s worth trying to think about what is most likely to happen, not what should happen.

So here’s where we are right now. The US is in an election year. If Trump doesn’t realise that he’s losing the faith of the population, then he’s about to have a very nasty wake-up call.

Markets are going to keep falling – just as they did in 2008 – until we reach a point where investors feel that a) the authorities have some sort of plan that might put a bottom under all this; or b) that prices have fallen far enough to discount the worst-case scenario; or c) a bit of both.

In 2008, it was hard to rely on b) because the financial system was imploding. There were moments at which it was genuinely difficult to figure out what a worst-case scenario could be, because it did seem feasible that almost any bit of financially-backed paper could end up being worthless.

Corona is different in that it’s not a collapse of the banking system (not yet at least). We also know roughly what would happen if the banking system did collapse (it would be nationalised or propped up in some way).

Corona is almost the reverse. It’s not a fragile financial system infecting the real economy. It's the other way around. The real economy will not evaporate. It’ll still be here. The tricky question now is: how much smaller might it be by the time this passes? And fundamentally, that’s what financial markets are struggling to price in.

Of course, it goes deeper than that too. The reason that markets have taken all of this so badly is because significant elements of them were overvalued to start with. The US stockmarket and the corporate bond market are the most obvious candidates on this front.

That introduces uncertainty about domino effects.

Are all these things we’ve been vaguely worrying about – carry trades, exchange-traded funds backed by illiquid underlying assets, massively overvalued private companies – going to blow up? And when and if they do blow up, what else might they take with them?

Coronavirus might be the pebble (OK, the massive boulder) that starts an avalanche elsewhere in markets.

That’s why markets are freaking out. They can’t see the bottom, prices aren’t low enough to convince them that the worst-case scenario is being priced in, and the further prices fall, the greater the risk that various players blow up and have to liquidate, driving further declines and further blow ups.

The good news… no really, there is a little bit

The good news is that China appears (I do stress that word, “appears”) to be getting over the worst, or at least to have seen the bottom in terms of the rate of spread.

Assuming that the figures are accurate-ish, and that the virus doesn’t mutate, and that we get enough time to develop a vaccine before the next seasonal outbreak, then it appears that there is an end to this.

Those are a lot of ifs, but let’s run with that idea.

The bad news is this: let’s say the US turns into Italy. Do you think that stocks are going to go up, just because they can see that there’s an end in sight? I don’t see it.

In short, there’s a lot more turmoil to endure before we see the bottom on this one.

As far as your money goes, I can really only reiterate what I’ve been saying since this started. I am not going to lie – I didn’t think this was going to get as bad as this. And believe me when I say I am kicking myself about that.

But for a long-term investor rather than a day trader, I don’t think my view would have been any different. Build a watchlist. Research the individual companies or investment trusts that you want to own. Look out for opportunities and have enough cash to take advantage of them.

Make sure that you understand what everything in your portfolio is there for, and what risks it is exposed to (if you own any exotic financial instruments, now is the time to be confident that they won’t break – I learned that lesson in potentially heart-stopping fashion during 2008).

Own some gold (its price will go up and down like everything else – particularly when people need liquidity – but it doesn't go bust).

Subscribe to MoneyWeek magazine.

Oh, and wash your hands carefully.

Until tomorrow,

John Stepek

Executive editor, MoneyWeek

Recommended

The coronavirus is scary – but it's irrelevant to your investments
Investment strategy

The coronavirus is scary – but it's irrelevant to your investments

The spread of the coronavirus is causing alarm around the world. And, while it could be a serious short-term threat to human health, it’s not somethin…
24 Jan 2020
Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures
Economy

Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures

Today's Money Minute looks ahead to the UK's latest all-sector PMI survey, and America's private payrolls report.
4 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Why China appeals to good investors
China stockmarkets

Why China appeals to good investors

China is one of the few places left to good investors hoping to make a decent return, says Merryn Somerset Webb.
14 Sep 2020

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Central banks want politicians to take charge – but what will they do?
US Economy

Central banks want politicians to take charge – but what will they do?

The US Federal Reserve has come to the end of the road in terms of what it can do to accelerate any recovery, says John Stepek. It's over to the polit…
17 Sep 2020
IAG's share price is ready for take-off - here's how to play it
Trading

IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.
8 Sep 2020