It’s Not the End of the World, But It Is a Bear Market

After the Chancellor’s statement yesterday in which he did a good job of scaring everyone about the economic impact of the coronavirus epidemic, and news coverage of the spread of the virus overnight, the UK stock market was in freefall this morning. That was not helped by sharp falls in the US and Far East markets overnight.

A bear market is when folks dump shares irrespective of a company’s prospects or earnings and is driven by herd following in index funds and others. When does a bear market end?  After many months and when shares start to look very, very cheap on fundamental ratios such as earnings or dividend yields. That is clearly some way off yet.

To have that happen the public do also need to have confidence that the virus epidemic is over and that only a few old folks like me have died or are likely to die as a result. That is at least a few weeks away. But the market recovery may start to take place as soon as there is the first sign that the world is not going to end after all, which it will certainly not.

Moving into cash is one possible short-term reaction but the Bank of England have undermined that strategy by reducing interest rates to record lows. AJ Bell Youinvest have just announced that they will not be paying interest on cash in clients’ accounts any more. Other brokers (not many anyway) and banks will no doubt follow to cut their interest rates on deposits. But if there is an economic recession then holding cash, or simply spending it, is not a bad idea until the economy revives. Now is the time to cash in your shares and buy a new car or a house extension! Or for the altruists, now is the time to donate money to charity, particularly as the tax-year end is coming up.

Meanwhile the national media seem to have decided the Chancellor’s budget is an inflationary one of the spend-spend-spend variety. Why should the Government not borrow money for some required investment in infrastructure when it can borrow money at such low interest rates?

But how much influence do the Chancellor or the Governor of the Bank of England have over the real-world economy? Not a lot in essence when it is mainly driven by external factors and public sentiment.

While this plays out, I will not be dumping shares indiscriminately but I will be exiting those companies that may be particularly badly hit by the virus, if I have not already. That includes travel and holiday companies, airlines, entertainment venues, pubs and hotels, high street retail operations where footfall will decline, etc. But I may buy those companies where the share price has fallen because of the general rout when their income is not obviously threatened – for example because they have long-term contracts or guaranteed repeat business.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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