On nights like the one that has just passed, you need to take inspiration from wise words that have been framed out of history. Europe looked at the worst one-day drop ever, with Germany down 12.4% in a night! The Poms lost 10.87%, but the sell off that takes the cake (or should I say panettone?) overnight was, you guessed it, the Italian one, which slumped, wait for it, 16.92%!
As I write, the Dow Jones index is down 7%, again, and I’m sure a lot of you would be asking: is it time to panic? And this is when I think of Tom Hanks — a recent coronavirus victim while here in Australia — and recount a great line in the movie Bridge of Spies.
In the movie, Hanks plays a US lawyer involved a prisoner swap with the Russians.
To one of the prisoners going back to Mother Russia, Hanks asked if he was worried that he might be seen as a traitor rather than a hero. And the prisoner came back with a great reply: “Would it help?”
Panicking about your losses in the stock market is understandable, but it doesn’t help. What we are seeing is the craziest crashes of the market — and I’ve seen a few.
The dotcom crash, especially in the US, was a sensible one. The GFC was an understandable one and so was the 1987 crash, which launched both my media and finance business. But this one, based on the potential reduction of one quarter of economic growth and at tops two, is madness.
That’s why I’ll go back to the great words of Rudyard Kipling and his famous poem "If". These lines are entirely appropriate right now:
"If you can keep your head when all about you are losing theirs and blaming it on you. If you can trust yourself when all men doubt you, but make allowance for their doubting too…you’ll be a man my son!"
This is the time to keep your head, which is easy to do if you’re invested in good quality companies. If you’re in solid super funds, the same applies.
During early 2009, I often spoke with Phil Ruthven from IBISworld, one of the world’s best researchers of industries and business. I asked him about what history says about the rebound of the Aussie stock market after a crash. Phil said our market rebounds between 30% and 80% in one year. Now that should help you deal with your panic.
Many people couldn’t take the pain of the sell off in the GFC and went to cash and wacked it in a term deposit at 6% and then saw our market rebound 36% between March and December that year.
This is like being in a hurricane or bushfire and you simply have to batten down the hatches. No one knows the real economic effects of the Coronavirus. And its guesswork that’s driving the stock market lower right now.
If you can’t understand why a virus can do this to stocks, look at the expected bans on crowds at sporting events and think about the revenue and profit losses. Since late February, one of the most famous soccer teams in the world — Manchester United — which is a public company, has seen its share price fall 30%!
No one knows if the bans will happen and how long they would last if they do go ahead, but those who do the numbers on stocks are doing their best guesses and they’re erring on the side of caution with a capital C!
The Government’s stimulus package of $17.6 billion was a good economic response to the threat of the virus and what it can do to the economy, but it wasn’t enough to impress a scared stock market.
More might have to be promised in the Budget. And yesterday the Treasurer virtually told me that if more is needed, it will be found.
Don’t panic. A rebound will eventually kick in.