Worst day on the markets since 1987
Global stock markets entered panic mode on Thursday.
A combination of the US announcing its EU travel ban, and half-hearted monetary stimulus from the European Central Bank failed to calm investor’s nerves amidst a growing coronavirus crisis.
It was the worst day for the FTSE 100 index of leading UK company shares since Black Monday in October 1987, and the second-worst day in history.
The FTSE 100 lost -10.87% to close at 5237.48 points.
Things looked only slightly better across the pond, where a pledge by the US Federal Reserve helped to arrest market falls.
The Dow Jones Industrial Average lost 8.41%, falling to 21,572.25 points, with the S&P 500 index falling by 7.78% to 2,528.07. For a second time in a week, ‘circuit breakers’ kicked in shortly after the market open to prompt a temporary suspension in trade.
In Europe, the broad STOXX 600 index fell by 11.48%. MSCI’s Asia Pacific index was down by 5.84%, and the Nikkei in Japan lost 4.41%.
On a global basis, the MSCI global index was down 8.32% on the day, now stood at more than 20% lower than its 52-week peak.
Investors are spooked by the uncertainty surrounding what will happen next with the coronavirus pandemic. Perhaps the biggest concern is that the sort of lockdown and loss of life experienced in Italy will materialise across the planet.
In the US, it was only the pledge by the Federal Reserve to inject an additional $1.5 trillion into the financial system that slowed falling markets. The Fed will pump this money into the banking sector with overnight loans and an expanded asset purchase programme.
European markets missed this announcement, made shortly after their close.
After falling earlier in the week, the oil price took another hit, with benchmark Brent crude down more than 7% to reach $33 a barrel.
It now seems likely that developed economies will tip over into recession due to the coronavirus pandemic, despite central bank intervention.
We’re in bear market territory now. Some will claim we are in unchartered territory, with the correction coming off the back of years of sustainable asset inflation due to quantitative easing.
It’s natural to fear the unknown.
While it’s tempting to sell when asset prices are sliding, there are some crucial factors to keep in mind at times like this.
Nobody knows which ways markets will move from here. Those who claim to have a crystal ball most certainly don’t possess this ability.
Selling investment now risks selling low and then being forced to buy higher. We often talk about the need to avoid timing the market, with the time spent in the market the most important contributor to investor success.
The scary headlines that follow significant trading days like today ignore the fact that, for the majority of investors, portfolios are not entirely exposed to equities.
Take, for example, the benchmark 10-year gilt, which today stands at 0.274%, down significantly from its 52-week high of 1.25%.
Gilt yields have an inverse relationship with their value, so a falling gilt yield means a higher gilt price. Investors with government and corporate bonds in their portfolios have seen the prices of these assets rise when equity markets have fallen, offsetting some losses.
An investor in a well-diversified portfolio will not experience the same sharp equity market falls we’ve seen today.
Yes, portfolios will be down on the day, even when they include some non-correlated assets. But this diversification serves to soften the blow somewhat.
Investing is, and always should be, a long-term endeavour. Investing for the short-term isn’t investing at all, but speculation.
What’s crucial at times of equity market panic is to relate your investment portfolio to your long-term financial goals, instead of viewing returns in isolation.
The fundamental principles behind sound investment remain as valid today as they did yesterday; diversification using mainstream investment assets, retaining a long-term view, linking portfolio decisions to financial planning objectives, and holding sufficient in cash to meet short-term income needs.
And of course if the investing headlines today leave you feeling unsettled, then do give us a call.