Market Update 2 – COVID-19 & Oil Prices
Given that it is more than a week ago that we first communicated about the coronavirus COVID-19 outbreak, we felt that it would be helpful to update clients on the most pertinent events during this time and summarise our thoughts on the continuing situation. Amidst a broad-based sell off in global equity markets, as investors have fled to assets of perceived lower risk, the US Federal Reserve made an emergency rate cut to counter fears of a major economic shock.
The Fed’s intervention did prompt a short-lived relief rally, but markets returned to negative sentiment in the face of the growing numbers of people infected with the virus across the world. Since the middle of February, the CBOE Volatility Index (or VIX) has seen a dramatic spike (see http://www.cboe.com/vix). The VIX is an index representing the market’s expectations for volatility and is widely used to measure the level of risk, fear, or stress in the market. Whilst it will be very difficult to call the bottom of the market and there will likely be further drops, it is worth noting that the elevated VIX index is said by some to signal a buying opportunity.
The sectors hardest hit over the past couple of weeks included automobiles, oil services, industrials and mining, which would be directly impacted by disruption to trade supply and demand. The worst affected sector was travel and leisure, as a potential collapse in demand from consumers as well as the threat of imposed government restrictions on movement hang over these parts of the economy. Other areas of the market such as healthcare, utilities and pharmaceuticals have proved more resilient. The latest price shock has come from the oil sector, as the oil price plunged overnight on prospects of an aggressive price war. Alongside this, we have seen the FTSE 100 open significantly lower this morning, in the biggest intraday drop since the global financial crisis.
Conversely, government bonds have rallied over the same period, with yields hitting historic lows, as investors sought their relative safety. Likewise, gold continues to rally as investors rotate towards traditional safe haven assets.
All in all, what we are seeing is markets trying to “price in” the risk of a global recession, as leaders acknowledge that COVID-19 cannot now be contained and is likely to have a profound impact on global supply and demand for an undetermined period of time. The very nature of this crisis makes economic projections very difficult.
So, what does this mean for investors? Well, for clients of Five Wealth we would reiterate our previous message.
We can’t predict when the recovery will occur but are confident that it will happen. We do not try to time markets for our clients and would suggest that attempting to do so, has the potential to do more damage than good. We will continue to review events as they unfold and will contact you if we believe any action is required in relation to your investment portfolio. In the meantime, if you have any concerns, please do contact your adviser to discuss this further.