xtb

Are We Heading For A Repeat of 1929?

It’s impossible to ignore the various ‘goings-on’ around the globe as a result of the spread, and subsequent populace fear and panic, from the COVID-19 virus. Wherever and whatever the root cause may be, this is temporarily forgotten as nations implement various measures in a seemingly vain attempt to contain the spread within their borders.

So what of the markets? The impact of this virus is creating unprecedented activity that bears closer examination.

Are we heading for a repeat of 1929, I asked in the headline – primarily as I read in a weekend article an allegedly leading economist quoted as saying that we were. I believe that we are far from that situation, a medium dip for sure and one that will shake a few debt trees (that in all probability needed shaking anyway) but in a few months should see a slow upturn to more steady and sensible levels.

So far, in Europe at least, we have seen several spates of national protectionism hit the headlines. Let me offer a few instances:

The Italian government bonds have come under even more pressure in the last few months, so much so that they requested assistance from the European Central Bank. The head of the ECB presented a robust response (polite terminology for refusal) which immediately sent Italian government interest rates upwards.

In the UK, on 11th March we had the head of the BofE Mark Carney announce an emergency rate cut of the basic interest rate from 0.75% to 0.25% by the Bank of England, taking borrowing costs back down to the lowest level in history.

On the same day we had the UK budget in which the new UK Chancellor of the Exchequer, Rishi Sunak, unveil the government’s Budget 2020 with a clear focus on measures to alleviate the impact of the coronavirus pandemic. Further within the sub-text of the budget detail Sunak promised to give the health service whatever it needs to cope with the virus, ‘ whether that’s millions or billions of pounds ’.

Various other emergency measures were outlined including: - the normal statutory sick pay being extended for people self-isolating and for their carers - the greater availability of small business loans to cover losses – overall business rate reforms – various cash grants. In total figures, the Chancellor has put aside an initial minimum of £30 billion with the promise of further funding as circumstances dictate.

Several major international airlines fell into what they termed survival mode, with UK airlines including of British Airways, EasyJet and Virgin Atlantic calling on Prime Minister Boris Johnson for a bailout, as the US government announced entry travel bans for citizens of 28 European countries, now including the UK and Ireland.

The USA is not alone in ‘closing’ down its international borders, as we now have Germany, Australia, New Zealand, Denmark, Czech Republic, Slovakia, Malta, Ukraine, Pakistan, Colombia and Hong Kong announcing travel restrictions and quarantine measures – others are sure to follow.

Share prices have fallen dramatically in another travel related industry, the cruise sector, as some of the major operators such as Princess and Carnival have greatly reduced or cancelled their voyage schedules for the next few months – for example on the London Stock Exchange Carnival stock price was at 3.116 a month ago, today it hit a low of reached a low of 979.60.

So what is happening in the markets today? We have the FTSE hitting its lowest level since 2011 with the Nikkei 225, CAC 40, DAX, S&P 500 and Dow Jones all following this downward trend. The International Monetary Fund has announced a 50 billion USD emergency financing facility to assist countries combat the effects of COVID-19.

Some personal observations that are worth considering now follow.

At the beginning of the year, the average P/E (price to earnings ratio - the average P/E for the S&P 500 has historically ranged from 13 to 15) was 15 – so a company making 1 million profits was valued at 15 million. Not only is it highly probable that many of these same companies are going to see profits completely wiped out over the next few months, they are also going to suffer huge losses that will, again in all probability, be carried over well into 2021.

Perhaps this is as good a time as any to re-evaluate this average P/E ratio? Should a company ever be worth more than say 8 times for a normal business cycle? Then we could see a fundamental revaluing of stock markets around the world. Above and beyond this question of the P/E ratio, it is conceivable stocks could hit zero within the very near future which would essentially make a fundamental revaluation necessary and a very different investment set up introduced. There were signs back in 2008, when the markets crashed on September 29th, that that was just the pre-shock for a big one to come, which may be now and as much to do with unsustainable debt as COVID-19, the latter just being the long overdue catalyst.

So, yes, perhaps the way the markets are currently behaving is broadly similar to that in 1929, but I don’t think we are heading for a crash of that proportion and with those consequences. They may even rally for a few days but the general trend is down. Some predict the true level of the DOW is around 10-12k and that is a huge drop from the current level of 20,918.

I think the UK is different though as I consider many UK stocks are still “Brexit undervalued” anyway - so there’s still latitude for a good return on these stocks if you time it right! I’m not so sure about there should be similar current investor interest in US (look at the recent troubles in Apple and Boeing) and the Eurozone stock prices – but then I would say that wouldn’t I?

Of one thing we can be sure is that if stocks and bonds hit the bottom then the future wealth will still end up in the same hands within a few years - so keep smiling, keep your diligence up, invest wisely and stay safe and well.

Interesting post, in fact interesting times RickTheMac!

Just checked out the various markets and how they’ve fared since your posting and it looks like, that whilst they all took a dive even further down in the last three weeks, they seem to have all performed like Lazarus and risen again (slightly).

16 March 2020 27 March 2020
FTSE 100 5,151 5,471
Nikkei 225 17,002 19,389
CAC 40 3,881 4,341
DAX 8,742 9,612
S&P 500 2,386 2,565
Dow Jones 20,188 21,792

Also meanwhile, even the Carnival share price on the FTSE market went from 979 on 16th March down to a low of 620 on 18th March but is now back up at 987.

Odd fluctuations for sure but, as you might expect, of course there is an underlying thread of explanation. As the world population is aware they, and consequently the stock markets, have suffered a heavy blow over the last few months as the pandemic named Covid-19 has spread, gripped the global economy and driven a market slowdown.

Yet in the last week, almost in complete contradiction of this, we have seen rising oil prices giving some of the biggest shares on the London Stock Exchange a boost.

Oil has jumped 3 per cent to almost $28 a barrel, as a knock on effect of being supported by the US Federal Reserve’s latest actions to bolster the economy as well as hopes that the US will shortly finalise a $2 trillion covid-19 aid package.

Oil companies have benefited from this reversal in the commodity’s price with Royal Dutch Shell’s ‘B’ shares jumping 18.4 per cent and BP moving up 16.1 per cent. Simultaneously we have seen the associated mining groups Evraz and BHP jumping 19.3 per cent and 13.7 per cent respectively.

Other rises have been seen in the stock of products and suppliers that the nation has been making more use of during this time of lock-down, such as Zoom Video, Amazon, Netflix and Domino’s.

The virus continues to disrupt supply chains and weaken consumer demand but in the midst of this turmoil, the food industry and online grocery retailers have experienced an explosion in demand for home delivery services. This comes as a result of more people staying inside and ordering deliveries to their homes during the pandemic.

Ocado is well set to benefit from any such changes. The company has cemented its position as a leading global provider of technology for internet-based grocery shopping. Its focus on warehouse robotics and home-delivery technology is an attractive prospect for continued growth in the future.

Considering the fact that people still need to eat, it is easy to see why Ocado is the only company in the FTSE 100 index to rise this year. Last week’s gain of around 9%, against a slump of more than 30% for the index, can be attributed to recognition that the company is set to benefit from increasing demand for home deliveries.

Meanwhile stay safe with happy and profitable investing everyone!

I’ve taken more a world view on this and, obviously, matters have accelerated greatly since the original posters comments here just two weeks ago, with the global landscape having changed beyond anything I could have imagined in my lifetime!

With the COVID-19 pandemic creating new world rules, amidst the related deaths, lockdowns, curfews, blocked borders and conspiracy rumours inevitably the global economy is slowing down.

As knock-on effects of this we are seeing a rise in unemployment figures, businesses from small to large facing economic ruin and the stock markets dropping to all-time lows.

We are now seeing the virus start to take a grip on the USA with, inevitably, their total number of recorded cases now surpassing all other countries. As the world’s largest economy, perhaps it is sensible here to focus on the US markets and what they are telling us.

Historically the greatest World Depression recorded took place way back in the mid-17th Century then, after further large ‘dips’ recorded in the 19th Century, it is the Wall Street Crash of 1929 that most economists now recall. This had a ripple effect throughout the world as the USA GNP dropped by 33% with unemployment conversely rising by a similar percentage.

It therefore seems reasonable to extrapolate that as the current pandemic spreads across the USA there will most definitely be a similar outfall - a Depression of sorts it is just a question of the measure we should expect that is not yet predictable.

So what have the previous Depressions shown us if anything?

In the USA we have seen six major recessions in the last 50 years:

  • From 1973-75 we saw a recession, one of the longest, starting on 1st November 1973 through to 28th February 1975, primarily caused by the OPEC embargo.
  • From 1st January 1980 to 30th June 1980 we saw a recession, which was really an extension of the previous recession and partly exacerbated by the Federal Reserve’s economic policies introduced to fight inflation by decreasing money supply.
  • Again this recession really continued from 1st July 1981 to 31st October 1982 for much the same reasons as the previous.
  • From 1st July 1990 to 28th February 1991 there was a further, relatively mild, recession attributed to the continuance of a generally weak economy – various other world events, the Soviet Union break-up and the Iraq invasion of Kuwait, certainly didn’t help trade confidence.
  • From March 1st to 31st October 2001 this recession had numerous contributing factors from the dot.com bubble bursting, the hangover from the YTK bug scare and of course the 9/11 terrorist attacks on the World Trade Centre and the Pentagon.
  • Then the most recent from 1st December 2007 to 31st May 2009 recession is inextricably linked to the sub-prime mortgage scandal, although there were other lesser impacting factors.

https://irle.berkeley.edu/what-really-caused-the-great-recession/

You would think that after those lessons we might have greater fail-safe measures in place to prevent future crashes. However that is far from a sensible analysis conclusion. Unfortunately, the causes have been too wide-spread, from too many different failing areas of influence and just too diverse in nature.

Banks and the markets in general have put as many measures in place as practicable to ensure security - but who could have accounted for this pandemic and exactly how?

The truth is that no-one could and stocks will fall as much or more than they did during the 2008 recession.

The main question is not if there will be a global recession - that has now begun - but just how deep will this depression go?