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CORONAVIRUS
Stay the course amid the global panic
f
or the eighth time in only 22 years the US
Federal Reserve cut rates outside its usual
meeting schedule, cutting the benchmark
interest rate by 0.5 percentage points on
3 March, but US equity markets still dropped
by almost 3% afterwards.
Why the cut? The Covid-19 (or coronavirus),
with Fed chairman Jerome Powell saying: “The
risks to the US outlook have changed materially”
and “the virus and measures taken to contain it
will surely weigh on economic activity, both here
and abroad, for some time”.
Covid-19 is a human issue, with a projected
mortality rate of around 2%. By 8 March,
confirmed cases of infected people stood at
105 586 and the death toll at 3 584, according
to the World Health Organization. This means
the mortality rate is around 3.4%. If, however,the 2% figure is correct, we should have about
180 000 confirmed cases. It’s likely that we’ll
end up with a lot more, causing people to stay
home, hurting demand as they’re not spending.
But the bigger issue is on the supply side.
Working remotely is fine for some, but if you’re
in manufacturing, then the supply starts to dry
up and that happens across all sectors – from
electronics and garments to vehicles and food.
The Fed’s rate cut can only work on the
demand side. But if people are too scared to go
out, the impact extends to the supply side.
So, this is an economic issue. Global GDP
growth will slow, with Goldman Sachs saying in
late February that US earnings growth will be
minimal or even zero during the first quarter of- A global recession is a very real possibility.
Markets are going to remain under pressure,
at least for the rest of 2020. How will markets
respond to 180 000 people infected with the
virus? And what if it hits 250 000 or 500 000?
I’m expecting markets, domestic and global,
to remain weak for the rest of 2020 with possible
further downside of between 10% and 25%, but I
expect the worst to be behind us by 2021.
What should long-term investors do? In
short, nothing. Carry on. Buy those monthly
ETFs and save every month as you normally
would. If you have cash needs over the next
three years, ensure you’ve got that covered.
Traders: Obey your stops and reduce position
sizes as volatility increases and be careful of the
short side, it can get violent there.
Most importantly – don’t panic. This too shall
pass, and the world won’t end. ■
[email protected]As Covid-19 infections surge, and could climb higher, level-headedness is needed to get through the year.
By Simon Brown