Many investors have no experience of losses

Dhe spread of the corona virus has caused stock prices to collapse even further. There is currently no expert who wants to make reliable predictions about the future effects of the coronavirus. Estimates such as those of the Organization for Economic Cooperation and Development (OECD), if the outbreak is longer and spreads across the Asia-Pacific region, Europe and North America, and there is a global recession, are terrifying for investors. The sales button is pressed very quickly. The past trading days showed it.

The crash on Monday was followed by another even larger price slide on Thursday, which caused the prices on Wall Street to collapse as sharply as since the historic crash in 1987. The longest bull market in the history of the American stock exchange is now over. It lasted almost eleven years, from March 9, 2009 to February 19, 2020. Since then, the S&P 500 index has lost more than 25 percent, which, according to the official definition, has started a bear market. During the bull market, investors earned 529 percent based on the index rise and dividends.

It is pure fear that is influencing the stock market. Comparatively crisis-proof quality stocks were also sold mercilessly recently. The market experts continue to urge calm. For private investors who have lost a lot of money in the past six trading days, this is advice that should be difficult given a look into their own portfolio.

Parallel to the 2008 financial crisis

Christopher Smart, chief strategist at Barings, comments the price slumps on the stock exchanges very drastically: “What should have scared the markets the most this week is the dawning realization that nobody takes responsibility and there is no plan. Smart has complained that there has been very little coordination on how best to contain Covid-19.

The current risk situation is similar to that at the beginning of the 2008 financial crisis. Not because of falling prices or increasing volatility, but because of the information uncertainty, says Ivan Mlinaric from Quant Capital. “Neither the triggers nor the necessary countermeasures were clearly defined at the time – and they are not today either.” He continues: “Similar to 2007/2008, we are currently surrounded by a variety of trouble spots and causes,” says Mlinaric. “We see supply crises, demand crises, debt crises, even liquidity crises like in the American repo markets or in venture capital.” Not to forget the crisis in the oil market.

Are coordinated liquidity injections coming?

Many investors are no longer used to what is happening at the moment. A whole generation of market participants only got to know markets with clear trends and short, V-shaped corrections, Mlinaric continues. His advice to investors sounds understandable: “As investors, we should remember our old experience: If the markets are expensive and the economy is weakening, it is time to reduce portfolio risks and hedge economic risks.”

For many, however, that seems too poor. The call for the central banks, for coordinated liquidity injections, has become very large in recent days. However, many experts also admit that Fed & Co can only help to a limited extent in the current situation. The Fed’s first emergency rate cut in the past ten years and Fed CEO Jerome Powell’s reassuring words have not really calmed the financial markets.

ECB investors disappointed

“Although rate cuts do little to mitigate the direct effects of the virus on the supply side, coordinated liquidity injections could help the economy send a clear message to the market and stabilize the situation,” said Jeff Schulze, Legg’s investment strategist. Mason subsidiary ClearBridge Investments.

Olivier de Berranger, Chief Investment Officer at LFDE – La Financière de l’Échiquier, relativizes the impact of the central banks, but comments: “The central banks will not cure us, but they will help companies, consumers and states to weather the crisis better.

At first glance, the measures only seem to be used by large companies or speculators, continues de Berranger. “In fact, lower interest rates enable states to get into debt at lower costs and in this way launch budgetary or fiscal stimulus programs.”


Leave a Comment