Cheaper borrowing costs and a new tranche of asset-buying have featured in a package of measures announced by US Fed Chairman Jerome Powell to take on the economic effects of the Coronavirus outbreak.
The action is reminiscent of the emergency action taken in the wake of the financial crisis - US interest rates have been cut to zero and the Federal Reserve (the American central bank) will pump $700bn in the US economy by buying government bonds and other assets. There will also be a co-ordinated effort with other central banks to increase the availability of US dollars in the financial system.
Despite the measures, the FTSE dropped back to near the 5,000 mark at time of writing, indicating that forecasts of a sharp recession are currently dominating investors’ thinking. Positive action to help the economy is taking a backseat right now to negative headlines on the illness and the steps that will be necessary to overcome it.
The extremity of the reaction in markets is a reflection of the many questions now facing investors. The best information we have is that confirmed cases will increase in developed economies over the coming weeks and months, and that measures to halt the illness will be damaging to economic activity. Uncertainty is therefore at its highest and markets are pricing in a worst-case scenario.
Volatility in prices has also been extreme. The large one-day fall seen on Thursday last week was followed by the biggest ever one-day increase in the S&P 500 on Friday. It has been a roller coaster for investors.
Swings like that make the decision to sell assets now fraught with danger. No one knows what will happen in markets from here so it is impossible to predict whether selling now will be to your benefit or not. Those investors who contribute regularly to ISAs or pensions can at least reassure themselves that they are buying at prices which are low by historical standards, thereby improving the likelihood of gains in the long term.
The next period will require patience and calmness from investors. Decisions taken now could have lasting effects on investment returns over the long term and attempts to time the market rarely end well.
My colleague Tom Stevenson last week boiled down the actions investors should be considering to three points. They are likely to stand for a while longer.
- Do nothing. The temptation to liquidate your investments is only natural but in the long-run it may be a cause of regret. Selling after a fall makes the pain go away but it simply crystallises a loss. Remember, unless you abandon the stock market completely, you will have to buy back in at some point. If you wait until you feel better about investing, that moment will be way too late to benefit from the recovery that will come in due course.
- Keep investing through the cycle. You don’t have to be a hero, throwing all your spare cash into the market in an attempt to catch the bottom. In fact, you shouldn’t. It is very likely that this is not the trough. But if you continue to drip money into the market, this does not matter. You will be building positions at depressed levels which in the long run will serve you well.
- Don’t miss out on this year’s ISA and SIPP allowances. The 5th of April is a hard cut off. The generous tax advantages are ‘use it or lose it’. You don’t have to put money to work immediately (and if you follow the previous suggestion you won’t), but you do need to add cash to your account before the end of the tax year.
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. Tax treatment depends on individual circumstances and all tax rules may change in the future. You cannot normally access money in a pension until age 55.
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. 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.