There’s an old investing maxim that you should ‘buy on the sound of cannons, sell on the sound of trumpets’ - today sounds a lot like cannons.
If a global health emergency and predicted recession wasn’t enough for markets to be contending with, Saudi Arabia spent the weekend engineering an oil price war which led to an 30% collapse in the price of crude. The country has found itself at odds with Opec partners and Russia over the correct level of supply in response to the likely reduced demand resulting from Coronavirus. In the end it has decided to jack up oil supply and flood markets at just the time when they were already factoring in a dramatic cut to demand from the Coronavirus.
This left oil prices with only one way to go.
That was bad news for energy giants like BP and Shell which both fell by more than a fifth when London markets opened this morning. That was a big contributing factor in the FTSE 100 dropping between 7% and 8% first thing. Some of that has been clawed back but Monday still looks like an historically bad day for stock markets.
The FTSE 100 is now in ‘bear’ market territory - widely thought of as a 20% peak-to-trough fall. The Footsie hit a recent high in January around 7,674 points but at time of writing today was languishing around 6,040 points - a fall of more than 21%.
Sentiment took another hit over the weekend after Italy expanded measures to limit the spread of the virus there. The prospect of such restrictions having to be adopted across the world means economic forecasts are being rapidly downgraded.
In the UK, eyes turn to new Chancellor Rishi Sunak who on Wednesday will deliver a Budget that is bound to be shaped by Coronavirus and the Government’s response to it. The consensus seems to be that the rookie Chancellor has little choice but to shelve any radical plans he (or Number 10) may have had to restructure the economy. Instead we’re likely to get soothing measures aimed at reassuring the public that the economy can cope with any shock headed its way.
Emergency steps to allow the National Health Service to bolster staffing numbers could include changes to pensions rules. Highly paid NHS workers have suffered from the introduction of the Tapered Annual Allowance - the gradual reduction in tax relief available to those earning above certain levels. The way that defined benefit pension schemes of health professionals apply the taper mean that many doctors have faced unexpected tax bills - and some have even retired early as a result.
That’s suboptimal during a brewing health emergency so the Chancellor could move to reassure NHS workers that they won’t lose out on their pension by treating sufferers of Coronavirus.
Beyond that, the Chancellor is likely to announce increased Government spending and could relax borrowing rules which would otherwise mean taxes would have to rise. Squeezing taxpayers would only hurt growth at a time when the economy may already be weakened. There could also be money set aside to help businesses struggling with short-term cashflow issues.
Most of all, the Government will want to make clear that it has a firm hand on the tiller.
For investors, periods like this require calmness. 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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