Erich Kästner is a famous writer, everyone knows his cheerful books like “Das doppelte Lottchen” or “Emil und die Detective”. But the author also had a dark side, which comes to light in poems like “The Ballad of the Imitation Drive” in 1931 – children hang up with playmate Fritz there, as they saw in the newspaper when executing criminals. “If someone is not afraid, he has no imagination,” said Kästner once.
The worst things start innocently, according to his message. Unfortunately, this also applies to the stock exchanges these days. There is trading with fear that struggles greedily for the favor of money every trading day. And for many years, confidence had the upper hand. Since the financial crisis in 2009, prices have had almost one direction: upwards.
But the happy times seem to be over, the flying classroom is in a nosedive. The S&P 500, Nikkei and Dax literally together. Companies around the world lost a total of $ 4 trillion in stock market value. With the money lost in the past week alone, all 30 DAX companies could be bought three times.
A shadow lays over the financial markets, fear arrives. The trigger is the corona virus, a new type of virus that attacks the airways and spreads at a frantic pace. The epidemic in China becomes a pandemic, the course of which can be traced on the world stock exchanges: Japan, South Korea, Italy – and now Germany.
It is only a matter of time before infections and deaths soar in other countries and continents like America. The Sars-CoV-2 virus spreads far too effectively for this to be able to stop it. For many days and even weeks there are no symptoms to be seen in the sufferer who ignorantly transfers the virus to others.
But as dangerous as it may be, the disease in itself may not trigger a stock market crash. Above all, fear and precautionary measures paralyze the economy: employees stay at home, trains don’t run, trade fairs are canceled.
There is a fundamental question for investors: are we witnessing a correction that will bring new momentum to new heights? Or are we currently experiencing a crash, the start of a bear market? For some observers, this may not be so unlikely: “A downward spiral is impending,” says Robert Shiller, Nobel Laureate in Economics, in an interview with the Handelsblatt.
However the courses go, panic is not a good guide. However, it is not naivety either. For example, US President Donald Trump recommended the entry into stocks via Twitter, his economic advisor Larry Kudlow agreed that investors should “seriously take advantage of the slump to get started”. The advice from the White House is understandable in an election year, but only recommendable to a limited extent. Further slumps could follow, valuations are still high.
Investors should react prudently and appropriately to their circumstances. Under no circumstances should investors cancel their share savings plans or liquidate their securities accounts. The world will not go under, the slump should be used to get started – but carefully. The right behavior for every investor depends heavily on the goals and the positioning of the portfolio. And from the personality (see the instructions for different investor types).
There is a real opportunity for long-term oriented investors who have cash at their disposal. According to Anik Sen, global equity chief at New York’s Pine Bridge investment firm, the price dip is “incredibly healthy” after the high gains in the past. “Anything going up in a straight line is very susceptible to exogenous shock.”
There is an emergency
Stocks have long been overvalued. The economy has been weakening since 2018, and more and more companies are warning of lower earnings. Still, stock prices rose to record highs. Even in 2020, when the corona virus from China infected more and more people and ever larger parts of global trade.
How could that be? There is an emergency in the world. The interest on bonds is low, some savers even have to pay penalty interest if they have their money on the high edge. The investment pressure was high, drove more and more investors into stocks and justified ever higher prices.
The result was an unreal stock exchange world in which the prices only climbed upwards. The German Dax lagged behind the major stock exchanges for a long time, but was finally infected by the global share euphoria and still reached an all-time high on February 19 with 13,789 points.
Then the swing came. America’s technology giant Apple announced record numbers in January, which gave investors a new high. But a few days ago, the iPhone manufacturer cashed in its sales forecast again.
CEO Tim Cook and his chief financial officer Luca Maestri no longer presented any new forecast. The cause is the corona virus and the resulting “unforeseeable consequences of possible delivery bottlenecks” for Apple for components of his iPhone.
Unpredictable consequences? Investors hate nothing more than uncertainty. At the same time, images from northern Italy flickered on television screens last weekend, where the authorities quarantined some regions in the face of the Corona outbreak. Austria stopped train traffic with Italy. Wherever the investor looked: negative headlines. No wonder that the epidemic has also hit the stock exchanges since Monday. The courses collapsed worldwide.
Anything going up in a straight line is very susceptible to exogenous shock. Anik Sen (Pine Bridge equity chief)
The decline cannot be justified with emotions. The epidemic has tangible economic consequences. In the “Baseline Scenario”, economists at Oxford Economics already assumed that the seasonally adjusted global economy would shrink in the first quarter of 2020 – for the first time since the onset of the financial crisis.
Overall, the institute expects the global economy to grow by 2.3 percent in 2020. That would also be the weakest value since 2009.
However, it is already clear that the “baseline scenario” will not occur. It gets worse. Because according to the scenario, the virus could have spread massively, but should have been limited to China. A global pandemic has started to spread to Europe, which according to virologists could end in April or May at the earliest.
According to Oxford Economics, this would plunge the euro zone and the United States into recession in the first half of 2020, but according to the economic research institute, this would be followed by a rapid economic recovery in the second half of the year.