After our stock market plunged 7% on Monday, I know the question I’m going to have to answer today is: “Why did it happen?”
That question becomes more demanding when you learn the Dow Jones Index was down over 2000 points at one stage!
The simple answer is that the cut-throats who the world’s oil supply depends, Saudi Arabia and its OPEC buddies plus Russia (which coincidentally is known as OPEC+) have poured oil on the ‘fire’ that is the Coronavirus. Yep, the virus is threatening world supply of stuff out of China that business needs and killing demand worldwide, especially in tourism and most cross-border business.
The north of Italy has been effectively shut down and government officials in Puglia in the country’s south are pleading with locals coming home from the north, not to!
The knock on effects are such that I might not be able go to the Annual General Shareholders Meeting of Berkshire Hathaway to see the legendary investor Warren Buffett in Omaha, Nebraska! This will mean hotels, airlines, travel agents and my business will cop a loss. This is how an interdependent world economy works or doesn’t work!
Just remember that the Coronavirus is a curve ball and we don’t know how bad the infections and deaths will be. That’s why stocks fell badly last week.
We are now down 19.9% and we fell 7.4% yesterday on the oil drama, so the coronavirus gets blamed for about 12% of the problem on stock markets. But it will get worse before it gets better.
That’s because we don’t know how business’s bottom lines will be affected — and that’s why share prices are falling on speculation, made worse by computer trading and the new age of investing, which includes exchange traded funds, share-buying on loan funds and other exotic market products.
Then a squabble between Saudi Arabia and Russia has taken the oil price down, wait for it, 30%, to $US28 a barrel! Industry oil-watchers think this battle could take the price down to $US20.
The damn virus and its economic effects had already KO’d the oil price, so this was adding insult to injury for the oil industry.
Unfortunately, a lot of oil companies have high yield corporate bonds out there. And if the companies behind these bonds are smashed by a low oil price, it could effectively make these bonds junk, which could undermine financial institutions that are connected to these bonds.
This is why Bank of America was down over 15% overnight and our banks copped it yesterday, with CBA down 6.47% to $69.15 — and it will go lower today!
So how worried should we be?
Very worried, because there are too many uncertainties out there. Personally, I’m hoping President Donald Trump has made a few phone calls to Vladimir Putin and Saudi Arabia's King Salman, where I expect he has asked: “What the f---k/!”
Donald has tweeted that the world should love low petrol prices, and the world does. But financial markets don’t, and that’s why the US stock market was routed overnight.
But let’s keep all of this in perspective. This temporary world-changing virus — with short-term but serious economic implications — plus this oil spat have created problems, and this chart shows what they have done to stocks.
Stock prices have wiped out the gains since January 2019.
The only good news I can throw in is that, roughly speaking, if you have remained in stocks since the GFC, you’re up about 6.5% a year on capital gain and about 4.5% on dividends. So you’ve could have made around 10% a year, but you have had to cope with some scary days on stock markets.
And this is based on you holding stocks as good as the All Ords or S&P/ASX 200 Index, which good super funds have pretty well done.
Be clear on this, we’ve got a tricky and serious situation for stock prices, but if an oil deal emerges ASAP, possibly pressured by the likes of Donald Trump and other world leaders and the infection/death rates eventually slowdown from the Coronavirus, then stock markets will bounce back.
Also, the cuts in interest rates and the worldwide fiscal stimulus packages will in-build a huge engine for growth that will power markets up later this year. And any recession will be short-lived, provided the coronavirus is nailed in an acceptable period of time. It’s a problem of what happens when you invest in the stock market but over the long term, the market gets you richer than term deposits. That said, it can be bad for getting a good night’s sleep!
Watch the latest episode of Switzer TV: Investing below: