Last Updated on 15 October 2020 by F.R.Costa

Against all odds, financial markets have been decimated so far this year. Volatility is here to stay for many weeks and I really don’t know how well we will get out of it in terms of the economy. But we always managed to recover.

No one could imagine how bad a virus hitting a Chinese market by the end of 2019 could turn globally. But, unfortunately, bad thing progress very rapidly. From a few infected in Wuhan at first, the number grew to more than 80,000 in China and 180,000 worldwide. The new corona virus, or covid-19, is currently a pandemic and certainly the worst global tragedy I have in my living memory. I’m currently writing this confined to my house where I have been for most of the time of the last three weeks.

Let’s put the health problem (physical and mental) aside for a moment, as that has been extensively discussed in the media, in forums, on TV, in the streets, everywhere, and talk a little about markets. Currently, no market has escaped a blood bath, despite all efforts from central banks and policy makers. The table below very well depicts this situation.

The FTSE All-World index is down 29% since the beginning of the year and 31% just in the last month. The Dow Jones, the preferred Trump’s barometer, is down 30% and 32% in the same period and up just 7% since the US President was elected in November 2016. In the UK the situation isn’t better, as the FTSE 100 is also down above 30% in the year. The Russian market is taking an even worse hit. But, unlike all other markets, the case with Russia is indirectly related with covid-19, as there are only 150 cases reported. The problem with Russia is due to the effects of covid-19 on global oil demand mixed with an output war between Russia and Saudi Arabia, one that Russia can’t certainly win, as no one can produce oil at such a low cost as Saudia Arabia can.

I’m really sorry for all long-term investors that are going through a difficult period. But, just hang tight. This is not a time to sell, unless you really need liquidity. If you went through the financial crisis of 2007-2009, you certainly learnt that the success for long-term investment is ignoring the day-to-day changes in the market. It may take months or even years for the recovery to occur, but the market has been able to revert all losses at all times. So, from a long-term point of view this is an opportunity to buy, not to sell.

For short-term players, the view is different. This is a time to play with volatility. I believe things will worsen before they improve. The current €750 billion Pandemic Emergency Purchase Programme (PEPP) package approved by the ECB to keep sovereign interest at low levels is a great help to build a recovery. The same applies to the massive interest rate cuts conducted by the FED. But, for now, the problem is on the public health side. No interest rate cut will do anything for it and until this health crisis peaks, we will experience volatile markets, going mostly down. So, in the perspective of traders what matters the most isn’t what central bankers do but what politicians and public health authorities do to contain the problem.

In my view, only Asian countries have so far understood how bad the reality is, as European governments have only slowly adopted measures, the UK is gambling with a non-scientific approach and the US is pretending this is a Chinese disease.

For all this, I believe markets are going up and down, with bear traders winning most of the time.

About F.R.Costa

Filipe has more than 20 years experience with financial markets. He holds a degree in Economics with a specialisation in Finance and he's currently finishing a PhD in Finance. He used to work as financial consultant and research associate but then decided to return to academia five years ago. Since that, he has been an Invited Lecturer, teaching courses on Investments, Financial Markets, and Monetary Economics. He is also a regular contributor writer at The Master Investor Magazine.

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