The Three Little Pigs

  • 07 Jul 2020
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The Three Little Pigs

We could try to give you an explanation of the market movements over the last few months. It would include a discussion about liquidity injections, massive policy action, or other intelligent sounding explanations you might like. However, in the real-world time moves forward and an uncertain world looks very different from a hindsight perspective. Investors act as a crowd and the crowd does not behave in a consistent way.

We had a global pandemic that resulted in government actions which caused unheard of economic disruption and the fastest collapse in stock prices ever. 

This was followed by the largest policy stimulus ever and a rebound in prices that was almost as fast as the fall.

Despite the severe declines in economic activity and a complete failure in the attempts to stop the spread of the virus (for most of the world), the US market has recovered a big part of the losses, Australia has rebounded well. You can only see the impact at stock level with certain sectors, banks still well down along with severely impacted industries such as travel.

So, who was the crazy investor?

Those that sold when all we knew was the virus was spreading and we had to shut the world down? For anyone who understands business and economics, who listened to the government and health authorities, it would have been reasonable to be very concerned that we would have an economic and financial meltdown.

Then the Central Banks and governments took unprecedented action, which blew away any previous action they had taken only a decade ago in the GFC. It seemed reasonable to buy the market on this, but even if you thought that was the action to take, would you have had enough faith that the government would take the required action before they did? 

Belief in governments had rarely been worse and we have seen populist politics, bickering and paralysis for many years. You have the state and federal governments both making crucial decisions.

If you understood the mathematics of the virus, the only obvious prediction you could make was that when they loosened the lockdown, it was going to spread again (Australia and NZ almost eradicated, but the rest did not come even close). You would have looked at increases in the markets and thought everyone was crazy.

However, you would also have needed to know that public opinion and government policy priorities would completely flip. As the major economic impact of the virus was the government shutdowns, not the virus itself, the continued spread was less of a concern from an economic perspective if they reopened the economies. 

It appears that no group stands out as emotional fools on this occasion. It was not about irrational fear or crazy greed. 

If you had low quality investments, there were points where you would have definitely been reasonable to fear complete bankruptcy and many may still go down a path that leads to irrecoverable losses.

With a well-developed investment strategy, appropriate to your situation and built to withstand economic shocks, you can remain calm even when the wolf is at your door and you are not forced to make flip-of-the-coin decisions that will drastically impact on your future.

For further information or to discuss how we can help you, please speak to your adviser.