23-28 February Panic Week
While it is impossible to predict when a panic will occur this week's price movements should not have come as a complete surprise. Some, however, are more understandable than others. The main action has been in US equities, which had been leading other markets higher. Such a sudden about turn is bound to cause alarm. Passive investment works both ways and previous over-valued favourites can be expected to fall furthest. FOMO was concentrated in a small number of growth stocks, some but not all of which really were generating higher earnings. Most companies were not doing especially well and so returns had become dependent on their shares prices going up (often assisted by buy-back programmes). After ignoring fundamental factors for too long, investors have realised that none offer any support. In geopolitics, division and reckless posturing are the norm. The global economy has never properly recovered from the GFC and growth has been drifting for the last 5 years or more. The main locomotive of China has been slowing long before the COVID-19 epidemic. A relatively recent development, however, has been the growing realisation that monetary policy has run out of bullets. This is undoubtedly fueling some of the panic. There really are few positives to latch on to.
It is important to see COVID-19 as a catalyst rather the sole cause. One or more corrections of 10% or greater have been inevitable since at least as far back as the extraordinary rally in Q1 of 2019. There will be bounce-backs: investors have to do something with their money but also more panics. This really is time to 'keep your head while all about you are losing theirs'!