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The markets still have further to fall, so prepare for the second wave

I still don’t think the reality of Covid-19 has sunk in with the markets. I think that the recovery, when it occurs may be swift, but it’s a long way off yet.

There is so much that we don’t know about Covid-19, but we do know a lot about previous virus outbreaks. I don’t think the markets have fully factored in the lessons from history.

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Spanish Flu and the second wave 

We know, for example, that the Spanish Flu outbreak of 1918–1919, which claimed the lives of 40m–50m people, came in three waves. The most serious wave was the second one.

The lesson of other viruses, such as flu, and even other iterations of coronavirus such as SARS or MERS, is that they are seasonal. They are at their worst in the winter.

This explains the UK government’s rationale of trying to achieve herd immunity as quickly as possible — get as many people from low-risk groups as infected as possible and the second wave will be less serious. At least, that’s the theory.

The risk to this approach is partly that immunity to Covid-19 might turn out to be just like immunity to other viruses and only lasts a few months.

Regardless of what happens in the UK, I believe that globally the real damage from Covid-19, both to the economy and more seriously to our health, will come later in the year.

Return to work 

There is also a big question mark hanging over what might happen when people return to work. If the current lock-down lasts a few weeks and things go back to a semblance of normality in the summer, what then? Will the virus return? Or will it return in the winter? What will happen in China, where people are already returning to work?

If the response to this danger is that the current restrictions around the world stay in place for months, then the economic shock will also be greater than is being widely estimated. I don’t think this is priced in by the markets.

I don’t think the markets have realised this yet, but they are pricing assets on the assumption things will improve in the next few months. They might improve, but I think this improvement, if it happens, will be temporary.

That’s why I think stock markets have got further to fall before they fully recover.

Not like 2008

I also believe that unlike the 2008 crash, which was followed by a very deep balance sheet recession, the Covid-19 crisis will be nasty, but short.

In some ways, it feels like we are on a war-like setting — war with the virus. Wars are often accompanied by massive government spending, and I think that the recent government measures announced on both sides of the Atlantic, which dwarf the stimulus measures seen post-2008, will create a much stronger recovery.

Things will get a lot worse before they get better, which is why I think shares will fall much further.

But the economic recovery will be strong too. Equities will recover. I suspect that the markets will price in the recovery some time after the reality of the second wave sinks in it.

And that is still several months away. The time to buy is when shares fall after the reality of the second wave sinks in.

5 steps that can help you to stay calm and invest on – whenever stock markets panic…

It’s ugly out there…

The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.

And with the Covid-19 virus now beginning to spread beyond of China and Italy, it seems very likely that the bull market we’ve enjoyed over the past decade could finally be coming to an end.

Against such a backdrop of market worry, it’s little wonder that many investors are starting to panic. (After all, nobody likes to see the value of their portfolio fall significantly in such a short space of time.)

Fortunately, The Motley Fool is here to help, and you don’t have to face this alone…

Download a FREE copy of our Bear Market Survival Guide today and discover the five steps you can take right now to try and bolster your portfolio… including how you can even aim to turn today’s market uncertainty to your advantage.

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.