As I write this on Tuesday 3 March, the US Federal Reserve just announced its intention to cut its benchmark interest rate by 50 basis points. The move aims to fight an economic slowdown that could gain traction because of the COVID-19 coronavirus outbreak.
And, according to news reports, the Bank of England is considering interest rate cuts as part of a broad range of “steps to support the economy and financial system.”
I think that’s important news because the UK markets tend to follow those of the US. And the American interest rate move appears to have boosted stock prices in the US, building on Monday’s gains – at least for the time being (15.30 hrs in the UK on 3/3/20).
Banks unhappy
The finance sector is down in the US though. Banks won’t like falling interest rates. And on the London stock exchange, I note that Lloyds Banking Group, Barclays, HSBC and other banks are all showing negative moves with their share prices – a case of the UK following the US again, perhaps.
It’s a fluid situation, which is why I was careful to record the date and the time of my comments above. It could all change tomorrow, next week, or indeed by the end of the day. And one strong possibility is that we haven’t seen the bottom of the move down for the markets.
It’s typical of markets in a down-trend to show sharp reversals, for example. Indeed, the gains of the early part of this week could disappear in a flash, and share prices could plunge lower still, even undercutting their lows of last week. If the news flow relating to COVID-19 really digs in and accelerates, we could see an eventual top-to-bottom correction of 50%, or more.
Indeed, COVID-19 is a wildcard that has thrown out the window most previous assumptions I was making about the markets. So how is a poor investor supposed to handle such powerful set-backs?
Where to focus
One place to start could be to make sure that the shares you’re holding are all backed with companies running strong, high-quality businesses. I’d look for players dominant in their trading niches and businesses with defensive, cash-generating characteristics. You can get a good idea about how the stocks you’re holding measure up by looking at their financial and trading records.
I like to see a record of generally rising revenue, earnings, cash flow and shareholder dividends. And it’s good to have robust profit margins and decent returns against assets and capital invested. For me, modest levels of debt are desirable too.
Maybe it’s time to think again about the shares you may be holding of companies with weaker business models, such as cyclicals and those facing high competition.
If you’re happy with the underlying quality in your portfolio, maybe a second step could be to ignore the general news and concentrate only on what your investee companies are reporting. Tough it out, and hold through this uncertain period.
Finally, you could put more money to work in the markets if decent stocks representing quality businesses sell at discount prices on any further stock market falls. Or drip-feed money into managed and tracker funds.
For what it’s worth, I’m doing all those things with the expectancy that 10 years from now I’ll be glad I did.
