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Notes on a crash: the short, medium and long term view

13 March 2020

We are nearing the end of one of those weeks that will remain in the memories of the investment community for a very long time. Because of the extremely rapid fall from the all-time high that global markets had reached on 19 February, this stock market crash is right up there with 2008, 1987 and yes 1929. However, this is where any obvious similarities end. Compared to those historical precedents, this one has been caused by an external – and widely expected to be temporary – shock to global economic activity levels.

This week the headwinds that markets had to contend with were boosted by three further factors which all could have been avoided, if those in charge had acted more responsibly and with a bit more foresight. First, the latent oil supply overhang that has been an issue for a while, meant that OPEC and Russia had to make some painful calls and compromises. When they failed to do so, the virus crisis was doubled up with a (reverse) oil price emergency. Since slumping oil prices derailed stock markets in 2015/2016, it was not surprising stock market participants reacted to the news with heavy sell orders.

The next two accelerators hit on the same day. Donald Trump’s COVID-19 action plan was so clearly insufficient, or barely even competent, that the full-blown virus scare had finally arrived for the US public. At the same time, capital markets experienced its very own ‘toilet paper panic buying’ moment. Except that it was cash that so many investors wanted to desperately get hold of, before someone else got hold of it first. Why such an outsized dash for cash? Well, as we already commented in separate notes over the few last days, shutdowns require higher levels of cash in circulation than in normal times. When, on top of this, speculative investors become distressed sellers to meet margin calls, then cash-raising pressures further push down liquid assets – be it stocks or bonds – quickly below valuation levels that cannot be explained by rational reassessments of the near-term future of the global economy.
We have noted with interest that private investors have acted far more rationally in this environment and did not join the panic selling in the herd mentality of old, as global fund flow figures showed. Have they perhaps learned from the financial crisis of ten years ago that market events like this week are best sat out, or if cash is available could even be seen as long-term buying opportunities?

 

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