Coronavirus market meltdown: Is the worst over yet?
In a short span of just one month, the world seemed to have turned topsy–turvy since our last market update in March. Much of the developed world is now in lockdown and social distancing has become the colloquial term amidst the largest humanitarian crisis of our time.
Offices, retail shops and factories have been shuttered and people have been asked to work from home or stop work entirely, with only essential services allowed to remain open as governments heed the calls of the World Health Organization (WHO) to implement the “boldest actions” yet to contain the spread of the Covid–19 superbug.1
Companies are laying off workers at unprecedented levels as revenue grinds to a halt for many businesses including airlines, cruise operators, as well as the entire hotel and tourism sector. It comes as no surprise that the longer this crisis drags on, the worse it will get for the world economy and that many more companies across various sectors would follow suit in the coming weeks and months ahead.
And if this isn't bad enough, oil producing nations from OPEC+ including Russia and Saudi Arabia had to deliver an untimely one–two punch to flood the oil markets with an excess supply just as demand came to a standstill2, inadvertently crashing crude oil prices from about $60 a barrel to roughly $20 a barrel and dealing additional pressure to the oil and gas industry with a double whammy of demand and supply shocks.3
The combination of these factors triggered one of the biggest selloffs in a single day for the Dow Jones Industrial Average on 9 March 2020 followed by another greatest single–day percentage fall on the 12 March 2020, overshadowing even the 1987 stock market crash.4
These unprecedented events inevitably led to the capitulation of the last bull market and has placed global indices in bear market territories. In many dire forecasts, economists are even warning that the risk of another Great Depression is highly probable if governments and central banks don't take drastic actions fast enough and that the current lock–downs persists longer than expected.5
So, the question begs: “Are governments and central banks doing enough? And is the worst for the stock market truly over?”
Central Bank
US Federal Reserve – From being the lender of last resort, the Fed has now also taken the role of being the buyer of last resort. In addition to lowering benchmark interest rates to near–zero, relaunching its asset–purchasing program and initiating a slew of measures aimed at keeping credit flowing, the Fed has also joined the US Treasury Department in programs that will provide funding to businesses of all sizes and has begun buying corporate bonds and other assets where it has not been involved previously, in order to free up frozen credit markets.6
In a show of strength and assurance to the market, Federal Reserve Chairman Jerome Powell also iterated that “We're not going to run out of ammunition” and that “We still have policy room in other dimensions to support the economy” indicating it will do whatever it takes and whatever necessary to avoid another Great Depression scenario.6
Other Central Banks – Elsewhere, concerted efforts in various forms by other central banks such as the European Central Bank (ECB), the Bank of Japan (BoJ) and the Bank of England (BoE) have also been rolled out to reduce interest rates, lending freely to banks and encouraging financial institutions to extend credit to firms affected by the crisis.7
United States
As the total number of confirmed case counts globally surpassed 1,200,000, the US has also overtaken Europe to become the new epicentre8 of the Covid–19 pandemic, triggering stay–at–home orders issues by governors across the country until 30th April.5 Number of infected cases soared to more than 337,000 with more than 9,600 deaths at the time of writing, 6th April.
President Donald Trump warned that “there will be a lot of death” as the US faces its “toughest week” yet in its fight against the coronavirus pandemic. However, in a glimmer of hope, the number of patients in badly strained intensive care units fell slightly, allowing hospitals room to breathe.9
On 27th March, after an intense and drawn–out negotiations between congressional Republicans, Democrats and the Trump administration, Congress finally passed a historic $2.2 trillion stimulus package and Trump signed it into law. Key elements of the package include sending checks directly to individuals and families, money for hard–hit hospitals and health care providers, financial assistance for small businesses and $500 billion in loans for distressed companies10, lending much support to where help is needed the most.
Also, for the month of March, nonfarm payrolls plunged 701,000 while unemployment rate rose from 3.5% to 4.4%, marking the first decline in payrolls since September 2010 and with about two–thirds coming from the hospitality industry.11 However, this is just the tip of the iceberg and jobs data released for the month of April could show as many as 13 million jobs lost, with unemployment rate rising to about 10–15% and GDP contracting by as much as 30%.12
However, the S&P 500 seemed to have shrugged off these gloom numbers and focused largely on positive news that the number of infected cases and deaths seemed to have slowed and rallied almost 20% from its 23rd March low of 2230 while closing around 2663 on the 6th April. Of course, there is no telling whether the worst is over, or is this simply a bull–trap before the market continues its downward trend as economic data and corporate earnings are released in the coming weeks ahead.
China
Being the first country to be hit with the Covid–19 outbreak and after strict containment measures, China offers a glimpse to the world on how life and the economy will be like when the coronavirus is being contained in a new normal.
As the second quarter begins in China, resumption of work rate for small and medium enterprises nationwide has crept steadily higher since early February at a rate of 76.8% as of 29th March but it is unclear how quickly or whether that figure can reach 100%. In the meantime, China's largest companies, such as major industrial enterprises, have official resumption of work rates of 98.6% as of 28th March, with a slightly lower rate of workers returning to work at 89.9%.13
However, not all businesses are allowed to reopen, including hard–hit movie theatres, as Chinese authorities try to limit the spread of the virus, especially from travellers returning from overseas. And while retail stores are open, shoppers continue to stay away from malls and businesses are struggling to stay afloat.14
Many Chinese say they remain worried about the possibility of new infections as more people return to work and they are also reluctant to spend much, fretting about job security and potential cut in wages as the economy struggles, opting for online grocery shopping and e–commerce instead.
Small businesses have been a focus of Beijing's response, announcing measures specifically targeted at small and medium–sized banks, as most of their debtors are already very likely to be experiencing financial difficulties. The added financial pressure comes as Chinese businesses, both private and state–owned, have come to grips with slower growth but ultimately, the concern for governments such as China's is ensuring people's jobs.13
Europe
Europe looks for lockdown exit strategy as the rate of new Covid–19 cases and deaths slows in Italy and Spain. Germany, Italy and Spain have all extended lockdown measures to 19th April, 12th April and 25th April respectively while the U.K. said that it would review its lockdown after 12th April (when it's estimated the virus could peak in the country).15
However, weighing up public and economic health is at the forefront of leader's minds. Get the timing of lifting restrictions wrong and a wave of new Covid–19 cases could flood already severely pressured healthcare services in Europe. Leave it too long, and Europe's economy will enter an even more prolonged downturn. It's already estimated it could take two years for Europe to return to late–2019 GDP levels.15
Still, investors are hopeful; European markets rose sharply as they reacted to the slowing down in the rate of new infections in the region.
Looming crisis in Emerging Asia
As the developed western economies struggle to contain the massive outbreak of Covid–19, official statistics in other parts of emerging Asia, including populous countries such as Indonesia and India, have only reported relatively lower numbers of confirmed cases.
As of 3rd April, Indonesia has only tallied 1986 confirmed cases and 181 deaths, with death rates at 9.1% compared to 5.2% worldwide. There are growing concerns that there is severe under–reporting of cases due to the lack of test–kits and the Eijkman–Oxford Clinical Research Unit estimated that there could be as many as 71,000 people infected with Covid–19 by the end of April and that between 600,000 to 2.5 million people could be infected by the middle of May, according to researchers from the University of Indonesia. The lack of protective gear for healthcare workers and medical resources are also cause for concerns, with the severity of the crisis not yet known.16
India, while on first glance seems like a Covid–19 success story, with its relatively low number of cases compared with the rest of the world, is likely only months away from a major health crisis as experts say the numbers are almost certainly too good to be true and may be masking a much larger outbreak. Prime Minister Narendra Modi announced a three–week lockdown and undertaken swift and early moves to restrict air travel. However, the main problem is the quality and scarcity of testing, as well as a large population of illiterate who may not be aware of the danger and openly disregarding local lockdown orders.17
In the grimmest outlook, millions of Indians will be infected in the following months with plenty of deaths to go along with it while the shutting down of a nation with more than a billion people will have significant and profound economic challenges.17
The Indian BSE Sensex index was also one of the worst performers, plunging about 33% year–to–date.
What lies ahead?
As Covid–19 sweeps across the world and with calls for an imminent recession18, governments and central banks have stepped up and demonstrated that they will do whatever it takes to avoid a prolonged recession.
Now that fiscal and monetary stimulus are in place, the final piece of the puzzle is for a medical solution so that life and the economy as we know it can truly return to normal. This has led to a race amongst health science and pharmaceutical companies to develop the next vaccine, rapid test kits, treatments and drugs to combat the Covid–19 virus. Masks and medical suppliers are also benefitting from a surge in global demand and this is evident in the performance of healthcare funds such as the Alliance Bernstein International Health Care A fund which is outperforming most sectors with a year–to–date decline of only 1.96% as of 6th April.
In addition, these new challenging times gave rise to renewed opportunities and triggering new ways of working, telecommuting, as well as home–based learning now that everyone has been forced to work–from–home and stay–at–home. This will inevitably lead to a further push in e–commerce and into the digital age and companies within the technology sector will also benefit from this digitalization. The tech–heavy Nasdaq fell by only 17% year–to–date compared to other broad indices, and funds such as Eastspring Global Technology fell only by about 10.6% as of 6th April.
We hope that as you watch intently on how the impact of the coronavirus would unfold in the following weeks and months along with how your portfolio value would fluctuate with each positive and negative development, don't forget to stay calm and invested with dollarDEX. Over the long haul, the coronavirus situation will be a thing of the past and stock markets will rise again.
If you are not confident of timing the market, one good way is to invest in smaller tranches or set up a Regular Savings Plan (RSP) on dollarDEX to smooth out the volatility and take the emotions out of investing. It is also important to have a diversified portfolio to avoid concentration risk in a particular sector or region.
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Information is correct as of 10/04/2020.
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3 https://edition.cnn.com/2020/03/18/business/crude-oil-prices-coronavirus/index.html
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5 https://nypost.com/2020/04/05/stephen-moore-warns-us-could-be-headed-toward-a-great-depression/
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9 https://www.nbcnews.com/news/us-news/donald-trump-warns-there-will-be-lot-death-u-s-n1177061
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10 https://edition.cnn.com/2020/03/27/politics/coronavirus-stimulus-house-vote/index.html
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11 https://www.cnbc.com/2020/04/03/jobs-report-march-2020.html
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14 https://www.weforum.org/agenda/2020/03/chinas-coronavirus-outbreak-shops/
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17 https://www.vox.com/2020/3/24/21190868/coronavirus-india-modi-lockdown-kashmir
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18 https://www.channelnewsasia.com/news/world/clear-we-have-entered-recession-imf-chief-12585232