With stocks selling off aggressively yesterday and bear markets taking hold in several parts of the world, investors have been warned to brace for further volatility but reminded of the promise of recovery over the long term.
The spread of the Wuhan coronavirus, which causes the fatal respiratory disease Covid-19, around the world has sparked a bout of extreme volatility in financial markets in recent weeks.
Yesterday was one of the worst sessions on record, after investors dumped stocks when Donald Trump announced that travel between Europe and the US would be restricted to combat the outbreak.
The FTSE 100 dropped 10.9 per cent yesterday, putting it on a year to date loss of close to 30 per cent. Equity markets around the globe suffered similarly heavy falls.
Performance of equities over 2020
Source: FE Analytics
Russ Mould, investment director at AJ Bell, said: “A 10.9 per cent fall in the FTSE 100 is the second worst daily showing ever for the index after the immediate aftermath of Black Monday in 1987.
“A negative response to the Trump administration’s handling of the crisis, including the ban on travellers from the EU, and increasingly stringent containment measures in several Western countries created a perfect storm for the markets.”
Every stock in the FTSE 100 fell yesterday.
The biggest losses were seen at miners Evraz and Anglo American, where the declines were north of 17 per cent; Ocado was down just 0.7 per cent, possibly reflecting higher demand for online grocery shopping as people self-isolate.
Biggest daily falls in FTSE 100
Source: AJ Bell
Neil Wilson, chief market analyst for Markets.com, pointed out that yesterday’s turmoil went far beyond equities and said there was a “total liquidation of investor positions”.
“Markets are at breaking point; there is a real systemic risk now with financial markets in complete turmoil over the coronavirus,” he said.
“Treasury markets showing immense signs of stress and a scramble for dollars whacking FX markets all over the place. Today has been utterly brutal. European shares had their worst day ever and it is not unduly pessimistic to suggest that panic has taken hold.”
In addition to the FTSE 100’s 10.9 per cent slide, the Euro Stoxx 600 had its worst day on record with an 11 per cent fall and the US dropped despite the Fed announcing another round of quantitative easing.
Wilson noted that even traditional safe havens were hit, with US 10-year Treasury yields rising towards 0.85 per cent (“There is real trouble in the bond market”) and the gold price falling (“Literally cash is the only thing investors want”).
Performance of gold vs global equities in 2020
Source: FE Analytics
While not calling the bottom of the sell-off, the analyst predicted that the market is likely to fall too far before rising again.
“The market is aggressively pricing for a major global recession,” Wilson said.
“There is total uncertainty and no one in the market has ever dealt with this kind of thing. No one knows what a total economic shutdown, however temporary, looks like. Shares are simply reflecting deep anxiety about the global economy.
“We will see an overshoot to the downside – this is pure panic selling taking hold – which will make the rally all the more swift when it comes.”
Darius McDermott, managing director at Chelsea Financial Services, noted that the FTSE 100 has dropped around 30 per cent since the start of 2020 but reminded investors that more pain could be on the cards.
“During the global financial crisis, stock markets almost halved,” he said. “It is entirely possible that happens again. We are in unchartered territory and no one knows how long the coronavirus will go on for, or the extent of the economic impact. Volatility will be here for a while.”
However, he called on investors to remain calm and look beyond the headlines. Those with diversified portfolio are unlikely to have fall as much as individual stock markets, as many absolute return funds, multi-asset funds and even some equity funds have not fallen as much as the market.
“For long-term investors, hard as it may be, I think now is the time to stop looking at your investments. It won’t be pretty. But eventually they will recover,” he finished.