The last week of February was one of the worst in the history of markets – global markets declined by more than 10% in USD. Pervasive panic as a result of the spread of the COVID-19 virus from China to the rest of the world dominated the news and social media. The virus has already brought much of China, a source of global trade and growth, to a standstill. There are hardly any flights over China’s airspace, few ships are leaving her ports and motorways are eerily quiet. It’s the stuff of science-fiction movies. It would have been hard to imagine just a few weeks ago.
But it was when Italy started to cancel football matches that the world properly paid attention. The coronavirus is coming to a town near you. And it’s causing havoc because it paralyses economies.
The measures for uncertainty in financial markets shot up. What if this thing derails global economic growth? What if ……..? You can complete the empty space with a million questions.
Financial markets always look ahead – sometimes with excessive fear and sometimes with unjustified optimism. At the end of last year, global share markets were too optimistic – blind to the risks that always lurk ahead. Now, we have probably veered toward excessive fear. It may get worse if the worst-case scenarios play out but these patterns are not uncharacteristic of markets. It is how markets behave, always have and probably always will.
What is changing, because of global connectedness and technology, is the ferocity of the swings – they have become wilder. Amongst other things, it points to global markets becoming more irrational especially at the ends of the swing curve.
We should take swings into account, not by trying to forecast them (you can’t, and anyone who says they can is not truthful or scientific about their abilities) or by trying to rationalise the irrational, but by assuming and accepting that they will come and that they will be increasingly wild. Our financial and life plans can and should account for wild swings.