The ongoing coronavirus pandemic has already engulfed 8,000+ lives, made thousands more sick, and caused a global health crisis that most alive today haven’t seen. It’s also wreaked havoc in the global financial markets, including in India.
For many of us, even those who witnessed the Global Financial Crisis of 2008, these are unusual & turbulent times in the capital markets. The economic threat of coronavirus, combined with the oil price war triggered by Saudis, have thrown global markets in disarray.
First, “Black Thursday” happened on 12th March 2020 when major global stock markets registered the greatest single-day percentage fall since the 1987 stock market crash. Nifty-50 was also down about 8% the same day.
The very next day on Friday, Nifty hit the lower circuit within the first 15 minutes of trading. But then after a 60 minute trading-halt, Nifty bounced 15% from its intraday low to end the day at approx. +5%! In the US too, major indices posted their largest one-day gains since 2008, jumping about 10% just one day after Black Thursday.
One can expect such swings in small/micro cap companies, but it’s almost unheard of in the case of benchmark indices.
And then something even more bizarre happened – over that weekend, the US Fed cut interest rates by 100 bps to 0.0-0.25%. The last time they brought it to such levels was again in 2008, and that time the markets had heavily cheered it. But this time, when the markets opened on the following Monday, the US markets crashed even more than “Black Thursday” that happened 3 days ago, ending the day about 12.7% down. The markets just didn’t seem to care.
But Why Are Stock Markets Crashing?
The volatility in the markets show no signs of stopping, and daily moves of 3-5% in benchmark indices have become now commonplace. But the coronavirus crisis has been in the making for at least 2 months now, since the World Health Organisation (WHO) first declared it as a global emergency on 30th January 2020. Why then, have the markets been reacting so sharply to it only in the last few weeks?
The simple answer is that it’s all about expectations.
Even if nothing happens on a given day, stock market prices will still move if investors expect something will happen in the future. And when expectations/anticipations aren’t properly factored in and the reality turns out to be very different, the markets react.
The global stock market is perhaps the most complex social construct created by human kind.
No other human system has so many different moving parts as the stock market – each second, millions of people globally consider thousands of factors that are impacting various countries, industries, and companies. And each second, this expectation of the millions of participants is distilled into a traded price.
For weeks after the WHO declared coronavirus to be a global emergency, the markets shrugged it off. Not only that, key global market indices actually reached their all-time highs in February, and even the Sensex-30 & Nifty-50 indices which had hit their peak earlier in January continued to stay around their ATH levels.
This market frenzy refused to stop even after NASA images showed that manufacturing activities in China had pretty much come to a standstill as the country battled to contain the spread of coronavirus. Most investors – rather most people – know that China is the world’s manufacturing hub. The largest companies of the world depend on China – from production of iPhones (and smartphones in general) to supplying Active Pharmaceutical Ingredients (API) for the global pharma industry.
And it’s not just production – China is also one of the largest consumers in the world of various products, services, and raw materials. Metals & construction related raw inputs are a prime example.
As such, even in February it became clearer that a restrained Chinese economy would not only result in reduced/disrupted production for the world’s largest companies, but also muted global consumption. But with most Governments across the world downplaying the public safety threat & the economic impact of the emerging coronavirus, some till as late as March first week, the global financial markets also continued to downplay this & not factor this in their expectations.
Thus far, the impact of coronavirus outside of China was only truly felt in countries like Iran, Italy, and Japan. It wasn’t until the number of coronavirus cases started spiralling in countries like the US, Spain, France, and the UK that the threat became too real for the markets to continue ignoring. And with it, came the real possibility of global economies entering a recession, even a depression some argued.
That’s when the markets started to panic. And panic is the arch-nemesis of stock markets. Panic selling starts a vicious cycle:
- People start selling
- Buying demand drops & supply increases
- Prices start decreasing
- This ultimately prompts more people to sell – and so goes on the downward spiral
Such sharp price drops also trigger various portfolio management stop/loss rules that most institutional money managers keep as means of risk management.
As an investment consultant at Willis Towers Watson in London – which has more than $2 trillion of assets under advisory – my job was to advise large asset owners like pensions funds, SWFs, etc. on asset allocation & which money managers to invest with. Most clients would invest their money in different global markets via various institutional money managers like AMCs, Hedge Funds, Private Equity, etc. The one thing common across most clients & fund managers was the notion of setting limits for portfolio losses. If/when these limits are breached, they’d have explicit instructions to pull money out so that their clients could somewhat still meet their liabilities & goals.
That’s what is happening now, in my opinion. Economic stimulus packages announced by various Governments will certainly help abate the market conditions, but unlike 2008, market liquidity isn’t an issue this time. Moreover, this is a crisis that everyone is feeling & understands – again unlike 2008, when very few people outside of the financial world truly understood what was happening & why.
This too shall pass, of course. In fact, I feel the markets will rebound as quickly as they’ve crashed once the threat of coronavirus has come under control, lockdowns are uplifted, and normal life resumes. But for that to happen, the real impact of coronavirus has to come under control. Until then, stay safe.
Disclaimer: All views/opinions expressed in this article are purely the author’s personal opinion and don’t represent that of anyone else.
Market crashes aren’t a new phenomenon – if you’re experiencing one for the first time, read 3 Stock Market Crashes that changed Investing to learn more about how similarly steep crashes have led to unexpectedly nice outcomes that redefined the investments world.
This article was also published on Moneycontrol.com on 23rd March 2020.