How long will this go on for?! (Covid-19 Update #8)

23rd March 2020

The graph on the left shows the movement in The Dow Jones Industrial Average over a recent 5 days.  The graph on the right shows the movement in the Dow over the last 12 months.

Are there any signals?

Of course, it is difficult to predict; however, I look at what is going on in China and now Italy. 

In China, for example, the number of new cases being reported has declined and it appears that the spread of Coronavirus across China has slowed down significantly.  This has taken about four months or so. 

I know what some of you are thinking: can you trust that data out of China?  Well, I actually take them at roughly face value.  Remember, it is not in their best interest for that outbreak to continue without serious measures.  It has been damaging to their economy, particularly in the short term, and I suspect may take approximately 12 months for the economy to recover. 

We look at Italy, who are right in the midst of the virus rapidly spreading; however, I suspect it will not be long before they too report a flattening of the curve and in due course, a sharp decline in the spread of the Coronavirus. 

However, the US were surprisingly (or not!) behind the curve on this one.  If we think about it, although the logistics are not easy, they could have done a lot more much sooner but just didn’t.  There will be fatalities and infections that were always going to happen, but a good many that could have been avoided with more decisive, early action (of course, it is easy for me to say that!).

For what it is worth, I think that the New Zealand Government are making a good effort, although again, in my opinion, I believe they are behind the curve.  They may well flatten the curve but greater containment may have been possible with more decisive, early action.  Good on them though for the efforts they are making right now, for all of our benefit.

America Worries

The American market has continued to decline as the market becomes more worried about the inevitable spread of the Coronavirus across America.  As I said, government action looks late. 

This does create uncertainty, which means lower prices, which translates into value emerging for us as investors. 

Expect further ongoing volatility, which of course ripples around the world every time the American market ‘sneezes’ as it were. 

Where is the bottom?

So, where is the bottom of the share market trough? 

I do not really know but I suspect it will be linked to the slowing spread of the Coronavirus.  For example, although we do not know that the American experience will be the same as the Chinese experience, if it took four months to slow down the spread of the virus in China, it may possibly give us some guidance as to the American experience.

One thing is for sure, until the peak, the popular media will leave nothing to the imagination as to the spread of covid 19 ! 

The ‘P’ word

Is this where I mention the word patience? 

Just because we average down or top up our investments, does not mean that next week or next month, the markets will automatically correct in an upward direction.  Indeed, the more traumatising the event, generally the longer it can take for markets to get over it and recover. 

Still, when we review some of the major market corrections that have occurred in the past, it has only taken somewhere around 12 to 18 months for markets to get back to where they were prior to the unsettling event.  That said, markets were quite expensive at the peak this year, with the Dow Jones getting close to 30,000. 

I do not listen to or watch the popular media much, so they may or may not be using emotive language, such as share market crash, meltdown, blood on the floor, trillions of dollars wiped off the value of markets etc. 

Regardless of all that ‘click bait drama’ mums and dads and businesses need the products and services that listed businesses on the share market provide.  Indeed, we know how important they become when we no longer can have access to them. 

Larger companies will roll through the Coronavirus event, although expect some of them to announce significant declines in quarterly or six monthly profit, which of course flows on to their annual profit. 

Be ready for the market to take a dim view of this and potentially continue to sell some of these companies down. 

That, of course, is our opportunity to increase our exposure and / or be patient – very patient if need be.

“The share market is designed to transfer money from the active to the patient”.

                                                                                                         Warren Buffett