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Monday’s stock market rout could get worse

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Black Monday? I don’t think so. Sure, the stock market rout of last Monday was dramatic. The FTSE opened 8.7% down, and closed 7.7% down. That’s obviously dramatic.
Clearly, too, any time that trading on the New York Stock Exchange gets suspended because of excessive volatility and plunging share prices counts as dramatic. Ditto the Dow Jones Industrial Average closing 7.8% down, with the broader S&P 500 closing 7.6% down.
And for a short time, the rush to safety saw demand for two‑, three‑, four‑, six‑ and seven‑year UK gilts spike so sharply that yields briefly turned negative, for the first time ever. That’s dramatic.

But Black Monday? I don’t think so.

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Memories of 1987

On the morning of Monday 19 October 1987, I was driving through the Midlands to a consultancy assignment.
I was still marvelling at the Great Storm of 1987, which had happened the previous Friday, and forced the closure of London’s stock market. I’d flown into Heathrow, with the devastation wrought by the storm clearly evident from the air. Getting into London was chaotic, and in the end, my meeting hadn’t happened.
But all of that was swiftly forgotten as the car radio relayed what was playing out on world markets.
The FTSE fell by 10.8%. The next day, it fell a further 12.2%. In a rocky few days, investors saw a quarter of their net worth simply vanish.
And the falls were even steeper elsewhere: on Wall Street, for instance, the Dow Jones Industrial Average closed down 22% on October 19. Stock market routs in Hong Kong and Australia saw more than 40% falls, and in New Zealand, over 60%.
That was Black Monday.

Volatility ahead

The past is a guide to the future, but never a perfect one. As with the events of 2007-2008, it is quite likely that we will experience considerable market volatility in the weeks and months ahead.
In both 1987 and 2008, markets continued falling for some time. After the precipitous falls of September and October 2008, for instance, it wasn’t until 9 March 2009 that the FTSE bottomed-out, reaching an intraday low of 3460.7 – although its lowest closing value was on 3 March 2009, when it closed at 3512.
But 1987 and 2007-2008 were largely financial crashes, albeit ones with complex factors at work. What’s happening right now is different.
To get a handle on what’s driving markets now, you need to look at the real economy, not financial markets.

And what’s going on in the real economy isn’t at all pretty. The reason: coronavirus.

Britain hunkers down

 Anything connected to the travel industry is heading south in this stock market rout.

The shares of pubs and restaurant chains have been hammered. Cinemas, sports – going forward, it’s reasonable to expect that anywhere where people connect person-to-person can anticipate lower footfall.
And formal ‘social distancing’ measures haven’t even been announced yet.
Banks have started to offer mortgage and loan repayment holidays, and extend higher credit limits. Early closure fees on fixed-term savings accounts are being waived.
It’s no surprise that measures of business confidence have plummeted.
One of the few business activities doing well is electrical retail. Online appliance retailer – which apparently sells 20% of the UK’s home appliances – has reported its third-highest sales day ever.
The reason? Sales of food freezers. Britain is stocking-up.

Buying opportunity

 What to do? How to play this strange and unsettling time?
I think we can look forward – if that’s the right phrase – to a period of market volatility. I also suspect that although markets recovered a little after Monday’s rout, they could yet head lower.

And whether they do head lower or not depends largely on how the coronavirus epidemic evolves, and the effect that it has on the real economy.
Put another way, it’s not difficult to see quite a few shares out there that are priced at bargain levels – but which could yet head even lower. When we look back on 2020, I am certain that the current market will be seen as a buying opportunity.
For myself, I topped-up just one holding during Monday’s stock market rout. My purchases are unlikely to be before the start of the new tax year, and a fresh ISA allowance. By then, it should become clearer exactly what the impact on the economy will be.
And by then, we’ll have a better idea which shares are bargains – and which are falling knives.

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