On Feb 19th the FTSE was 7,457.0. On March the 12th (a day in which the market fell 10.9%) the index closed at 5,237.50 representing a fall of just under 30%. Yesterday’s drop in the shares prices was the worse day since the Black Monday crash of 1987.
On Feb 19th the S&P 500 was 3,386.2. On March 12th (a day in which it fell 9.51%) the index closed at 2,480.64 representing a fall of approximately 27%.
Travel and leisure stocks falling by much more than the above. Just yesterday cruise operator Carnival lost a fifth of its value, while United Airlines felt 17 per cent, and British Airways 16%.
Even in the wider UK economy, companies including WHSmith, Go-Ahead and Travelex warned investors about the impact, while Cineworld, the second biggest cinema chain, warned that in worst-case scenario it would be unable to pay its debts.
Such falls despite the US federal Reserve cutting the key Fed Funds rate by 0.5% to 1.00-1.25% and the UK MPC cutting the Base Rate by 0.5% to 0.25% – representing the lowest UK rate ever.
European and Asian equities following suit.
Yesterday falls of almost an unprecedented nature were principally due to Donald Trump’s ban on travel from Europe to the US in a bid to stem the corona virus outbreak perhaps the ‘most expensive speech in history’. Investors are voting with their feet.
The markets are bracing themselves for a global recession. The lockdown of large urban centres, and a severe credit crunch.
Oil prices, which crashed at the start of this week, initially on the failure of OPEC and Russia to agree new production cuts to support the oil price, fell further amid the expectation that the US travel ban would cause more pain for the travel industry. Brent Crude is now trading at just over $30 per barrel having been above $60 bd at the start of the year.
Who are the asset class winners?
The Japanese Yen is often viewed as a haven during time of stress and has surged in value in recent days. Now trading at Yen 104 to the dollar.
Gold: Another safe haven asset.
Bonds. The yield on 10-year US Government Bonds at 0.70 Yield-To-Maturity is at an all-time-low yield as investors typically pour money into government bonds at times of stress.
The longest bull stock market is now over with the coronavirus outbreak proving severe enough to end almost 11 years of unprecedented post-financial crisis gains. $12.5 Trillion has now been wiped off the value of global equities in less than a month. In all when the financial system almost collapsed in 2008, the global stock market lost about $18 Trillion.
How might the financial markets recover?
Clearly a lot depends on Central Banks action and news developments but there have been 27 bear markets since the 1800s in which the average decline has been 38%. It has taken on average 60 months to return to the previous peak or 90 months in real, inflation-adjusted terms.
The average “event driven” bear market – a label that seems to fit the current situation – was a more modest 29% drop and has taken only 15 months on average to reclaim its previous peak. Central Banks still have some ammunition left and fiscal stimulus looks certain to come may mean the markets snap back, and start a new bull run later in the year.
However, the economic cycle was already very long and, given how strong markets have been over the last decade, it is very plausible that the slump deepens. This bear market is unlikely to find its nadir, until the aftershocks of the recent financial earthquake are over and the extent of the economic impact of the coronavirus becomes clearer.