WEEKLY E-MAIL

10 March 2020

SPECIAL EDITION:

US AND AUSTRALIAN MARKET UPDATE

By Paul Nicol

The Australian stock market has suffered its worst single-day loss in nearly a dozen years, as a brewing price war over oil added to the global tumult.

The benchmark S&P/ASX200 Index lost 455.6 points on Monday to a two-year low of 5,760.6. This morning, the S&P/ASX 200 Index fell by 218 points and traded at 5,542.5 but has rebounded off the back of a recovery in oil prices and Trump’s announcement of a US stimulus package. At the time of writing, the S&P/ASX 200 Index is at 5,830.5, up 72 points.

The sell-off began when an oil supply pact between Saudi Arabia and Russia collapsed, and both countries vowed to hike production amid weakening global demand due to the coronavirus and signs of an economic slowdown. The energy sector fell 20 per cent as a consequence.

Markets were already on edge as worldwide confirmed cases of COVID-19 reached 110,000, causing supply disruption and larger-scale quarantine measures as governments try to contain the outbreak.

Understandably, there is anxiety while there is no vaccine, and the virus continues to spread. Naturally, there is concern, but it is important to focus on the reality of the situation in Australia.

According to the Australian Health Department update on March 9 at 11:00am:

• There are 80 confirmed cases in Australia
• In the whole of Australia, there are 18 instances not related to travel – 15 of those cases are connected to the one aged care facility in NSW. Sadly, two residents of this facility have died.
• Half of the confirmed cases in Australia have been in NSW

However, the market reaction is one of fear, and we believe that real valuations should eventually reassert themselves. What is difficult is that no one has any idea how long the anxiety is going to last and we don’t yet know how COVID-19 will spread and how much damage it will do to the world economy. Two-thirds of the world’s economies have China in their top three trading partners. Consequently, end to end supply chains have been disrupted significantly. Three factors will drive economic growth consequences this year: how far the virus spreads and how long it lasts; how much fear inhibits travel, consumer spending, manufacturing, and trade; and what actions governments take to stop the spread of the virus and boost growth.

Fortunately, there is a global and domestic economic response being undertaken.

Before COVID-19, the global economy was picking up with Brexit confirmed and the phase one US-China trade deal giving people confidence for 2020.

Concerning financial markets, unlike during the GFC, global financial markets are liquid and open, and the banking system is well capitalised to respond.

Our firm belief is that investors should not allow irrational fears — often stirred by news or pundits who make wild predictions — to influence their financial decisions, especially their investing strategies.

We believe that it is helpful to look at events that have worried many in the past to see how they affected financial markets.

• When the United Kingdom voted on June 23, 2016, to leave the European Union, many thought the decision would lead to financial problems globally, and indeed the US S&P 500 stock index fell 5 per cent within a few days. But a year later, it was up 21 per cent.
• Greece defaulted on its debt some years ago. During the run-up to that event, Standard & Poor’s downgraded Greece’s debt to junk status in April 2010, after which the US S&P 500 index fell 16 per cent over the next ten weeks. But a year later, the index was up 31 per cent.
• The Russian satellite Sputnik was launched in 1957. This prompted fears that the Soviets could drop bombs on the United States from outer space. The US S&P dropped 10 per cent in three weeks, but six months later it was up 8 per cent, and by the following year it was up 30 per cent.
• After 9/11, the US S&P Index fell 12 per cent in two weeks, but it was up 7 per cent after six months and up 16 per cent the next year.

When unsettling events take place, our strong advice is not to react. We believe that it is best to stick with the long-term financial plan of being in a diversified portfolio that we have developed with you.

It is also important to note the strong rally in share markets that proceeded this volatility. For the Financial Year to Date, as of the 9th of March, the S&P/ASX 200 Accumulation Index is down 3.8% and the US S&P 500 is down 6.6%. Nobody likes negative returns, but they come with the territory of being exposed to growth assets, and at this stage, they are not dire.

Our wish is that you, your family, friends and colleagues stay well and that the virus does not become a pandemic. We encourage you to be cautious, focus on the things within your control and highlight the importance of personal hygiene, including regularly washing hands with soap and water, to prevent the spread of germs and viral illnesses. If you are feeling unwell in general, please take the time to get yourself well.

The panic might continue, or we might experience a quick recovery. However, historically, the best plan when bear markets present themselves is to sit tight, follow your long term financial plan and wait for the recovery.

Paul Nicol

Managing Partner
Senior Financial Planner
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2017, 2018 & 2019
Authorised Representative No. 230876

If you have any questions or comments, please email me at paul@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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