After a torrid few days in stock markets investors will be searching for any sign of resistance in prices at the start of the week.
A rally this morning did not last - an initial 2% gain for the FTSE 100 on Monday was soon cut back - but after a 12% fall in UK share prices last week any resilience is good news.
As we get more information about the spread of the illness, markets are better able to price in its likely effect on company performance. While the news remains very worrying, we are slowly becoming better able to quantify what’s going on.
Before last week, Coronavirus was known about but it was not yet clear that it would seriously affect the global economy. That changed when a spike in the number of cases outside of China was reported. Markets quickly realised that the response to the outbreak would involve action disruptive to economic activity, and that such action may have to take place across the world.
That was a dramatic change of backdrop. Markets had been riding high with a new all-time record for the S&P500 set just the week before. Then came news of a sudden and dramatic threat to prices with very little information on how bad things would get. It’s hard to imagine anything that markets like less than that.
Many questions remain unanswered and the headlines are expected to get worse in terms of new cases and fatalities but, from a market point of view, the biggest hit to sentiment - relative to where we were - has likely now passed.
The focus now will be on how lasting the hit to global growth will be. There has been a discussion about whether Coronavirus represents a hit to supply or demand - or both. You can see this playing out when you assess the prospects for individual companies.
For example, Apple - the largest company in the world before Coronavirus struck - announced that action in China to curb the spread of the illness would affect its factories in the country. Fewer iPhones would be produced and therefore earnings in the first quarter of 2020 would be lower. That’s a supply shock.
On its own, this hurts but any lost ground can still be recovered. Just because there a fewer iPhones made doesn’t necessarily mean that fewer people want iPhones in the long run.
However, as Coronavirus spreads and economic activity is disrupted a demand shock also begins to emerge. As economies take a hit, people and companies become more fearful of spending - and demand for iPhones falls.
Some of this can be mitigated by the actions of central banks and governments. That’s why today’s modest recovery in prices followed news that the Bank of England, US Federal Reserve and Bank of Japan were ready to act to stimulate growth via lower interest rates or quantitative easing.
Unfortunately, that good news was accompanied by news of cuts to OECD forecasts for economic growth, which then pushed share indices lower again.
This may well be the pattern for some time to come. Periods like this can be unnerving for investors so it’s worth going back to first principles. Long-term investing means accepting volatility and if you invest on a regular basis, the ups and downs in the market are to your advantage. When markets fall you automatically benefit by getting more shares or units for your money. This is known as ‘cost averaging’ because it can considerably lower the average price you pay for your investments. And, if you buy when prices are low, you reap all the rewards when they rise again.
If you are tempted to sell investments you should ask yourself - ‘if I sell, when will I buy in again?’
There will always be bad news for markets to worry about, so those hoping to sell down investments now will almost have to buy back in at a time when the outlook is still uncertain.
That’s the hard bit about trying to time markets. You don’t just need to get one call right, you need to get two. Selling out is the easy bit because you can do it and swim with the crowd at the same time. Buying back in, on the other hand, requires a contrarian approach that few, when it comes to it, are comfortable adopting.
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Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.