Stockmarkets go from panic to hysteria

published 11 March 2020

The stockmarket has passed from “panic mode into pure hysteria”, Ayush Ansal of Crimson Black Capital told Simon English in the Evening Standard. Battered by the spread of coronavirus and the tumbling oil price, Monday was the worst day for many global markets since the 2008 financial crisis.

Losses on Wall Street were so severe that trading was halted for 15 minutes on a day when America’s S&P 500 index plunged 7.6%. The 30-company Dow Jones Industrial Average saw a similarly dramatic collapse. Italy’s FTSE MIB index lost nearly 10%. The FTSE 100 and pan-European Stoxx 600 indices both officially entered bear markets, defined as a 20% drop from the most recent high. Australia’s market fell by 7.4%.

Money flooded into safe havens. Gold briefly rallied above $1,700 per ounce for the first time in seven years. The yield on five-year UK government bonds fell below zero for the first time on record, and that on US 30-year Treasuries slipped below 1%. Last Friday marked the 11th anniversary of the day that the S&P 500 index bottomed out at 666 before starting its long bull run. In a suitably satanic twist, ten-year Treasury yields marked the anniversary by falling to 0.666%, notes Bloomberg’s John Authers.

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Prepare for recession

Crashing stockmarkets and emergency interest-rate cuts make it feel like 2008 all over again, says Neil Shearing of Capital Economics. Yet today’s world is quite different.

The 2008 crash was a financial shock followed by “an extremely slow recovery as households and financial institutions repaired their balance sheets”. The coronavirus crisis may provide a “sharp shock” this quarter as factories are closed and cities locked down, with a brief but nasty recession perfectly possible. But activity should rebound quickly “provided that the virus fades”. Even more emergency central bank money will only further juice a recovery when it arrives.

Emergency rate cuts have yet to have much impact, notes Jeremy Warner in The Daily Telegraph. Action by the US Federal Reserve, which delivered a 0.5% rate cut last week, has failed to calm the waters; indeed it seems “to have added to the alarm”. Black Monday 2020 will go down in history as the moment when a “decade of denial finally ended”, says Larry Elliott in The Guardian. Perpetually low rates have long masked the “underlying fragility of the global economy”. The era when asset prices could rocket ever upwards on a “giant wave of debt” may finally be at an end.

Two things are needed for this turmoil to end, says The Economist. First, “evidence that virus infection rates” are peaking. Second, stocks must become cheap enough to tempt “bottom-fishing investors”. We are still a long way from either.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.