What caught my eye this week.
Feels like only a couple of weeks ago I was reminding everyone via Weekend Reading that shares can go down as well as up.
I needn’t have bothered. The past ten days – and most especially the past week – has provided an exhilarating reminder that stock markets can fall faster than you can say “no, for the hundredth time, UK government bonds are not riskier than shares.”
Indeed this has been the fastest decline from a high for the US stock market of all-time. UK shares are down 11% for the week, too, and the average UK pension fund has lost a whopping 5% to 6% of its value since Monday. Put that into your SWR calculator and smoke it.
Things were definitely feeling freaky by the fourth day of 3-4% declines. When the US market bounced higher into the close on Friday – perhaps on the expectation that central banks will make some sort of statement about interest rate cuts this weekend – you could almost feel the relief, even though all the main indices still ended the day in the red.
UK government bonds, for the record, are up.
Just in case you’ve been living in a bunker – which is where we’ll all be in a few weeks, according to some – the cause is the novel coronavirus. COVID-19, as we groupies have started to call it.
This pesky not-quite-a-critter has been causing traders to second-guess their portfolios since it came onto the radar early this year. Only a few weeks ago I spoke with The Accumulator and revealed that I’d moved to my largest ever cash position in my portfolio, naughty active trader that I am. But in case that sounds clever, know that I’d halved this horde by the middle of the month when I saw the log graph of Chinese infections flattening out and thought, like many, that the end was possibly in sight.
Below are two resources I’ve been glued to for weeks. You can take what you want out of the data they present – squint and it’s still possible to be optimistic – but for me that’s the beauty of them. Just the facts, ma’am:
I’ll keep checking in with those sites, but I suspect we’re in new phase now.
Everything changed for me (and many others, it seems, given the market sell-off) when it became clear that Italy had a major outbreak on its hands, almost overnight.
Italians are a warm, sociable, and tactile people with a beautiful country that people like to visit. I felt it was potentially game over for containment after that.
I won’t bore you with too much of my poundshop epidemiology. Suffice to say I have come to see the logic behind medical views like this:
Lipsitch predicts that within the coming year, some 40 to 70 percent of people around the world will be infected with the virus that causes COVID-19. But, he clarifies emphatically, this does not mean that all will have severe illnesses.
“It’s likely that many will have mild disease, or may be asymptomatic,” he said.
As with influenza, which is often life-threatening to people with chronic health conditions and of older age, most cases pass without medical care. (Overall, about 14 percent of people with influenza have no symptoms.)
The whole article is worth a read if you want to know more lore about COVID-19.
Perhaps the coronavirus will be with us for a year or longer, until it burns itself out.
Three months ago it didn’t exist in humans.
What does this mean for the world, for its economy, and for the future earnings of companies?
Markets are not falling because teenage traders are scared witless of a bogeyman. This seems much bigger than SARS and much deadlier than swine flu. To my mind the declines are a rational response, as investors try to discount three aspects of this health scare:
- The economic cost of the disease and death it causes.
- The economic cost of the attempt to avoid that disease and death.
- A bonus uncertainty discount because this situation is novel and we don’t know how exactly different companies and sectors will fare.
Only a market actually has any hope of figuring this out, because it’s so darn complicated.
For example, people may think it’s a practical idea to close airports and send everyone home from work. But that would have a massive economic impact, with long-term consequences.
Tax receipts would be lower, for instance, and so spending on other deadlier illnesses stretched. The supply of food, drugs, and other essentials would be disrupted. You might kill hundreds of people out of sight in an effort to avoid a couple of hundred people catching COVID-19 and a dozen dying a month before they would have anyway.
This is a nasty virus and any death it causes is a tragedy for that person and their friends and families. We should take reasonable steps to slow it.
But look at who is most likeliest to be killed by the virus1:
The blunt economic truth is many if not most of the small minority (c.2%) of infected people who may ultimately be killed by COVID-19 would probably have died of something else before too long, anyway2. It’s horrible to think in these terms, but this is exactly the sort of choice governments are forced to make when deciding how to respond.
It’s also what the market is trying to guesstimate. Actual deaths will probably not be too insanely disruptive in a strict economic sense, even if it becomes a pandemic. (Most of its victims aren’t working, and most of their consuming is done.) But trying to slow the rate of deaths could still cost global GDP at least a trillion dollars, according to one estimate by economists today. That’s a high price to pay for something that may not even be effective.
Singapore and China have seemingly had some success in containing the virus. However it’s hard to imagine Western populations following their protocols.
Slowing down the rate of transmission could get us to a vaccine with fewer COVID-19 deaths. That would be desirable, notwithstanding my earlier comments about unintended consequences.
But keep in mind this kind of virus mutates. So a vaccine may not be fully effective, and would probably need continual updating. Or it may arrive when the virus is close to extinguishing itself anyway, and ultimately be of little practical use.
To my mind then the market declines have been orderly and pretty logical, in the face of the potential disruption. Outside some extremely expensive-looking glamour stocks and some clearly threatened individual sectors (especially tourism), most markets have declined by about 10-12%. Sectors have similarly declined about 10-12%. Everything has de-rated a notch, in other words, mostly from high levels.
The market seems to be saying we’re all in this together. Not quite the spirit of Brexit Britain or Trump Towers, I understand, but probably true. So its best response is to knock a year or twos of profits off the spreadsheet and wait to see if there’s a reason to put them back on, or else to get more aggressive.
So much for the wisdom of crowds. What should individual investors do?
I can tell you what investors have been doing, which is trade. Retail investor favourites like investment trusts plunged on Friday morning before recovering as the day went on. And in the US, Friday saw the first ever $100 billion trading volume day in a single security – the S&P 500 ETF with the ticker SPY.
As I noted on Twitter on Friday morning:
At least one UK broker/platform seems to have frozen with today’s torrent of selling and is currently unable to execute trades. 2008 vibes. Please don’t panic. There are bad scenarios but there are also many scenarios. Hopefully your diversification is working. Take a breath.
In the follow-up I was asked what somebody should do if they were 10% down.
The midst of a panic is the wrong time to be asking yourself this question. I replied:
If you’re a very rare trader with edge, you’ll act according to your strategy.
If you’re one of the majority of traders with no edge, this volatility may be revealing. Go passive.
If you’re a passive investor, don’t become an edge-less trader in a panic. Stick to your plan.
— Monevator (@Monevator) February 28, 2020
I understand it is easier said than done. Passive investing has delivered tremendous gains over the past decade, but when markets fall it can feel like you’ve set up your sun lounger in front of a combine harvester.
But weeks – or months or even years – like this are part of the deal when it comes to risk assets. We wouldn’t get those great returns without pain along the way, because if there was no pain then everyone would be at it and the gains would go away.
So stay calm. Stay diversified. Remember we’re playing a long game.
And have a great weekend! With a bit of luck the sun will come out soon. A bit of Spring might slow this thing down, if and when it takes off here.
More on Covid-19:
- Yes, it’s worse than the flu: Busting the coronavirus myths – The Guardian
- Fear and influenza: How viruses spread – A Wealth of Common Sense
How to calculate the capital and contributions you need in your ISAs and pensions – Monevator
From the archive-ator: The simplest, most effective investment decision you will ever make – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3
Two-in-five are draining their pension pots at a rate of 8%+ annually – ThisIsMoney
UK house prices rise at fastest rate for 18 months – The Guardian
Gains in UK life expectancy stall after decade of austerity, report says [Search result] – FT
The data-heavy Credit Suisse Equity Yearbook: 2020 edition is here – Credit Suisse
Dollar cost averaging vs. lump sum: The definitive guide – Of Dollars and Data
Products and services
The Financial Times has launched a campaign for clear pension charges [Search result] – FT
Freetrade has just cut the cost of Instant Orders to £0, so it’s now free to trade instantly – Freetrade [We both get a free share when you sign-up via that link]
ISA season will be another damp squib for cash savers – ThisIsMoney
“My investing firm won’t let me move half of my Isa funds to a rival without losing the tax wrapper” – ThisIsMoney
RateSetter will pay you £20 [and me a cash bonus] within 30 days of you putting in your first £10 – RateSetter
Monzo and RBS to enable customers to check their credit scores for free, in-app – Finextra
Funds versus investment trusts: A simple 10-year test – IT Investor
Why a ‘best buy’ fund from a selected list isn’t a sure bet [Gasp!] – ThisIsMoney
Comment and opinion
A crisis is the worst time to learn your risk tolerance – Pragmatic Capitalism
Warren Buffett’s sobering advice: ‘Reaching for yield is really stupid’ but ‘very human’ – CNBC
A rebalancing recap – Money Observer
Is £12 million enough to retire on? – Fire Vs London
You don’t owe your company your undying loyalty… – Slate
…sometimes you just have to ‘shed your skin’ and move on – Indeedably
Simon Lambert: Will the chancellor be brave enough to get rid of the 60p tax rate? – ThisIsMoney
A truly bold chancellor would scrap National Insurance and merge it with income tax – The Guardian
Markets have always been rigged, broken, and manipulated – A Wealth of Common Sense
Should index funds be illegal? – Matt Levine via The Big Picture
The easy path to retirement – The Simple Dollar
Naughty corner: Active antics
Judging VC skill: The hardest problem in finance? – Byrne Hobert via Medium
The massive divergence between large growth stocks and small cap value – Alpha Architect
Warren Buffett’s 2019 letter to Berkshire Hathaway shareholders [PDF] – Berkshire Hathaway
SSE: An investment in a greener UK power grid? – DIY Investor
The other dark side [Short US bonds] – The Macro Tourist
Diageo is overvalued – UK Value Investor
How to start a hedge fund [Video, US] – The Compound [Wish I’d thought of this name for a podcast!]
Politics and Brexit
Post-Brexit, Britain is going its own way. It looks expensive – The New York Times
Kindle book bargains
[Note: These deals will only run until the end of Saturday]
Lab Rats: Why Modern Work Makes Us Miserable by Dan Lyons – £2.99 on Kindle
Secrets of Sand Hill Road: Venture Capital—and How to Get It by Scott Kupor – £1.99 on Kindle
Hit Refresh: A Memoir by Microsoft’s CEO by Satya Nadella – £1.99 on Kindle
Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth by T. Harv Eker – £0.99 on Kindle
Off our beat
Where did the weekend go? How work stole our Saturdays and Sundays – The Guardian
Why you can’t sell your business – Permanent Equity
Netflix’s Love Is Blind makes one wonder: Are straight people doing OK? – Guardian
“The beauty of value investing is its logical simplicity. It is based on two principles: What’s it worth (intrinsic value), and don’t lose money (margin of safety).”
– Christopher H. Browne, The Little Book of Value Investing
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- From the site: This probability differs depending on the age group. The percentage shown below does NOT represent in any way the share of deaths by age group. Rather, it represents, for a person in a given age group, the risk of dying if infected with COVID-19. [↩]
- Barring a mutation into something nastier. [↩]
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]