09/03/20Market correction – some things to consider
It’s been an eventful day for global stock markets with a sharp market correction. Some are calling it Black Monday.
The combination of investor anxiety around the coronavirus epidemic and an oil price war between Russia and Saudi Arabia caused some fairly dramatic events.
In the UK, the FTSE 100 index of leading UK company shares fell to almost a four-year low. It means around £125bn was wiped off the value of the largest British companies today.
With its heavy exposure to commodities, the index fell by 7.7% in a day, closing at 5,965.77 points. The one-day fall was the worst for the FTSE 100 since the global financial crisis of 2008.
Two major oil companies, BP and Royal Dutch Shell, each experienced their worst-ever days of trading.
What drove the oil price lower overnight was the decision by Saudi Arabia to cut prices after Russia refused to cut their output to match lower demand. This too was the consequence of the global coronavirus epidemic, prompting a slower economy.
Benchmark Brent crude fell by nearly a third overnight, with its biggest fall since the 1991 Gulf War. It has recovered slightly since to end down around 20%.
On a global basis, stock markets across the world took a tumble during this market correction.
One notable event took place in the US, where stock market trading was temporarily suspended for 15 minutes at the start of the day. This so-called ‘circuit breaker’ is automatically triggered to delay panicked trading.
The Dow Jones industrial average shed more than 2,000 points at one point during the day, which represents its biggest-ever intraday fall.
During such a sharp market correction, it’s only natural for investors to feel anxious.
For many newer investors, the volatility of this magnitude is a fresh experience. Even for more experienced investors, it’s been some time since the last bout of volatility this severe.
It’s unclear what could happen next in investment markets.
The UK now has 319 confirmed cases of coronavirus, with five deaths from the Covid-19 disease.
Italy’s Civil Protection agency confirmed today 7,375 cases and 366 deaths, making the country home to the most infections outside of China. Around 16 million people in northern parts of Italy now face travel restrictions and ‘social distancing’ measures.
Investors are clearly concerned about how bad the coronavirus epidemic could become, and its impact on the global economy.
When you feel unsettled by market volatility, it’s important to keep a few things in mind.
For a diversified investment portfolio, allocated to a spread of investment asset types, the returns you experience are unlikely to closely reflect the returns reported by the newspapers.
Where there is ‘negative correlation’ between investment assets in your portfolio – some investment values move up when others move down – the worst of equity market falls are typically offset, at least to some extent.
The negative returns we experienced today are only a small element of the long-term returns seen by investors. Depending on when you started investing, your portfolio might well be still sitting on gains.
History tells us that equity market recovery tends to happen very quickly and without notice, following sharp falls.
There’s a natural temptation to pull money out of investments following a sharp market correction. The challenge then becomes choosing an appropriate time to reinvest.
In many cases, this approach sees investors selling when prices are low, before buying when prices are higher.
It’s perfectly natural though to feel unsettled. If this is the case or if you have any questions about the impact of coronavirus on your financial plan, do give me a call.