Coronavirus, Covid-19, SARS-Cov-2, the virus that has caused a pandemic, measures that were previously unthinkable and that has sent world markets into free-fall. The panic that the coronavirus has brought in global markets is as vivid in daily life. Shopping is no longer the same. We wear face masks, gloves, keep a meter or more of distance from others. Life is no longer the way it was just a few weeks ago.
I, for one, find going to to the supermarkets one of the most stressful exercises. You are surrounded by others who may or may not carry the virus. Walking down the aisles, avoiding others and not getting too close becomes a drill. The countless times that I headed towards a particular article on a shelf, only to halt, because someone else was approaching. The random person who is not fuzzed by the virus and has made it his or her mission to get as close to you as possible in spite of all the warnings and the danger the virus poses. Even though I am not in any of the risk groups, the Captain Finance family has just grown. Our son is an awesome little guy, a magnificent addition to our family, who lights up my heart, even when he gets upset over me changing his diapers. With a newborn I am very conscious of the danger the virus represents and its dire consequences. I thus am frequently on the edge when going out to the supermarket. Does this feeling of angst extend to my investments? Absolutely not.
Before coronavirus - Previous crises
I only remember too well the Great Recession and its consequences for the financial markets and the world economy. I had been in the midst of my PhD. Over a few days I saw my portfolio diminish before my eyes, at least in theory. As I never sold any of my assets I only endured the mental strain. From an investment point of view, holding on to my investments and adapting turned out to be the best decision. After the initial shock and slight depression, I opted for the best mental strategy: forget about your portfolio, don't check its value, get on with your life, and focus on the many positive aspects that life has to offer. This strategy, not pondering about the depreciated portfolio value, allowed me to live a much more relaxed and happy life. I stopped checking my account for a number of weeks until the market had bottomed and the reversal set in. At this point my anchor point for my portfolio value was rather low.
With the stock market recovering, my portfolio simultaneously recovered and the effect of my mental health was highly positive. The “secret” to staying sane lay in ignoring the effects of the financial turmoil on my personal wealth. I knew that my investments were wonderful companies that, although currently battered, would again yield great returns. Most of them even continued paying dividends throughout that period leaving me in a financially good place regardless of their momentary share price. As history has proven, this strategy worked tremendously well and I saw my portfolio climb from one high to another in the following years. During the downturn I heavily invested any cash that I could spare picking up some fantastic bargains that even in today's downturn still stand strong and remain in positive territory.
Coronavirus – a pandemic crisis
Let's jump forward eleven years, the period end of February and beginning of March 2020. The days ringing in a new bear market, a downturn in financial markets unseen before. It appears that every new crisis comes with a heavier blow to financial markets than the previous one. The world had never before seen a depreciation of share prices as significant as during the following weeks. The Dow Jones fell almost 3,000 points, 13% were shed of its market value on Monday, March 16th, 2020. The German DAX saw its worst day in history with a drop of almost 13% as well. The FTSE got battered resulting in an almost 11% loss and the European stock index Stoxx Europe 600 fell 11.5%. These losses outweigh any of the previous crises, the September 11 attacks, the stock market crash of 1987, and the Great Recession of 2008 that caused a 7% drop in a single day before capping investor's losses.
What is worrisome about this crisis is that it isn't just an economic or financial crisis, it is not man-made, it is a crisis of many first, numerous unknowns, panic that extends far beyond markets. People are worried about their loved ones, their health, have become scared of others as potential carriers.
Governments and central banks have deployed similar measures to the Great Recession, however, this time it is all different. No matter how much money they throw at this crisis, it won't help a single bit. This crisis is not of human making, it is a virus. It was not greed or a human mistake that led to the spread of Covid-19 – potentially you can argue that some governments and politicians underestimated the severity of the coronavirus and its contagiousness. This is first and foremost a health, a human crisis. The money, formerly known as quantitative easing, fed into the global markets, buying up bonds, ETFs, and shares won't fix this problem. The only remedy is to stop the lethality of the coronavirus and hope that with time its effects on humans are no more worrisome than influenza. Once the pandemic is contained, borders reopened, humans able to go about their regular lives, this fight is one. Which brings me to the point of the title: Should I sell my shares during the coronavirus pandemic? A resounding No, well, maybe yes.
Shall I sell my shares during the coronavirus crisis – The impact
Let me explain. While during previous crises the end was predictable, this time around it is unknown. The world is on lockdown, the spread far from being contained, the economic shock to the world economy has not even really been felt.
Governments across the globe stepped in promising billions and trillions in Dollars, Euros, Yen, and Pounds to counteract the economic impact on businesses and its respective country's citizens. Businesses were reassured that their government would not let them go under as a consequence of the economic impact derived from the global lockdown. Workers and employees were promised to be kept on the payroll with governments picking up some of the tap. Tenants are told that are being given more leeway if they find themselves in arrears in paying their rent.
All this sounds reassuring, the problem, however: this crisis has only just begun. We are far from having seen the substantial economic impact the confinement measures will have on the finances of individuals and businesses. No one knows when we are allowed back into bars, the work place, travel, holiday, and even meet family and friends. All sounds rather gloomy, doesn't it? But, and this is a huge BUT, humans have persevered throughout other pandemics before, the world has experienced two world wars. Each single time the world economy bounced back stronger than before.
How does the coronavirus compare to other pandemics?
We are bombarded with terrible news. It's something the media strives on: Breaking News. The more shocking, the better. Of course the situation is scary, of course there are many unknowns, but let's look at other crises that came before. Just today I spoke to someone who is at the epicenter of the coronavirus crisis management, a real expert who deals with the worst of the worst, those who are in the need for ventilators and other serious interventions. It was very reassuring what he had to say. We are slowly seeing the peak in Europe, he said. The lockdown is starting to flatten the curve and our emergency services are again able to cope with the extreme pressures. He added that he believes the lockdown will continue for significantly longer, but that in the foreseeable future we will see an easing of the confinement measures. I believe this is good news hearing it from a medical professional who works at the forefront of this coronavirus pandemic. You hear similar arguments from many other virologists and medical experts. Let's not have the attention-seeking media outlets stir up even more panic than there already is in the markets and among the global population. Falling victim to the Breaking News evangelists only leads to panic buying and selling. Panic buying in supermarkets and panic selling in stock markets. Believe me, I am not one of those people who thinks the virus is the same as the influenza virus. It is not, neither in its contagiousness, nor in its genetic make-up. It is a totally different, unknown virus.
But the world has been here before, whether it was the Great Plague, or Black Death, that went rampant from 1347 to 1353 in Europe, killing up to 200 million people, or the Spanish flu, a terribly deadly influenza virus that killed 50 million people between January 1918 and December 1920 as it spread around the globe.
Two important things to remember. In the 14th century, the health system was worlds, or rather, centuries apart from our highly advanced health system we are lucky enough to enjoy today. The Spanish flu went rampant during World War 1, at least for half of its destructive reign. It was only in November 1918 that the world found peace again, at least on its battlefields. War and deadly virus are certainly not a healthy mix (excuse the pun).
The world has come a long way since, but the Spanish flu certainly gives some indication on how all of this may play out. The Spanish flu also had massive economic implications. All bad, you might ask? Trump recently proclaimed, in his typical manner, that the cure should not be worse than the virus and that he will open up the economy within a couple of weeks. Putting society on lockdown and implementing measures such as social distancing would destroy the American economy, he claimed. There is undoubtedly truth to the fact that the longer businesses have to shut, the more will go out of business and the longer the economic and societal pain will last, including everything from insolvencies to layoffs, mental fatigue to frustration.
In a recent article by Fed board economist Sergio Correa, New York Fed researcher Stephan Luck and Emil Verner of the MIT Sloan School of Management, put Trump's assumption to a test. Noteworthy, they did not test his claims directly but indirectly, as their research simply coincided with Trump's announcement. Analyzing the economic impact of the Spanish flu, they found that those geographical areas that met the Spanish flu with harsh measures including social distancing were the ones that recovered the fastest when the virus pandemic subsided. The measures taken are thus not only useful in containing the spread of the virus, but also in containing its negative impact on the economy, and in turn the stock market.
In a highly connected and intertwined world, does this assumption still stand? Most certainly. One strong geographic region can, through its strength, pull up other regions it shares trade relationships with and thus initiate a positive knock-on effect.
With that in mind, how long did it take for the economy and the financial markets to recover from the pandemic? Let's not forget that, strikingly different from the coronavirus pandemic, the Spanish flu went rampant in unison with the first world war. It is thus interesting to look at its economic consequences separate from the overall dire economic situation following the World War. According to a 2007 FED research paper by Thomas Garrett, the negative economic impact of the Spanish flu pandemic was short-term. He points out, however, that hundreds of billions of dollars will be lost in the immediate aftermath. A research paper by the European Union came to a similar conclusion. Whilst the pandemic itself is likely to result in high unemployment, massive productivity losses across the board, a slump in economic activity, the aftermath, if precedent can be extended to the current pandemic, may look much less gloomy. This is particularly true for the consumer sector. While some retailers may suffer and go out of business, others, such as Amazon, food delivery services, and other online consumer companies and retailers may enjoy a substantial increase in revenue and profit. In addition, we have seen governments across the world roll out extraordinary financial stimulus packages to counter the potential economic and financial consequences of the current pandemic. Given the measures taken by central banks and governments to tackle the coronavirus, the negative effects may be mitigated.
The real question is: will the pandemic lead to a short recession or a depression? The latter would be fatal for the global economy. A recession may be quickly resolved by a significant up-tick in economic activity. If people are still in a healthy financial position, the end of the pandemic and the lifting of the confinement measures will potentially lead to an unbelievable economic boom. I, for one, will base my next investment decision on the length of the pandemic and the developments concerning the coronavirus spread, the progress in finding a cure, and first and foremost consider the collective mental state across the globe before investing money in a specific company. A positive sentiment and optimism will likely result in a quick resolve of the economic impact. If people fall into a depressive state so too will the world economy.
Shall I sell my shares during the coronavirus crisis?
As I mentioned in the beginning. I have experienced two different crises in my investment life, the dot-com crash and even worse, at least for my psychological wellbeing, the Great Recession. It appears that each crisis is a multiple in severity of the ones before it. This pandemic has so many layers to it that selling shares may in fact be the best call.
However, there is a big BUT. I would only sell shares in companies whose management has still not learned much from the previous crisis of 2008. Among them are banks such as Lloyds or HSBC. One could refer to their low P/E ratio, but it is rather meaningless considering that they failed to protect their businesses ten years ago needing a bailout and are now again find themselves in a situation where they are forced to withheld dividend payments. What we will most likely see, even if all turns out well for the banking industry, are similar scenarios to the post 2008 years where bank managers paid themselves hefty bonuses draining the bank of capital that could have been put to much better use in advancing their businesses.
On the other hand, companies, particularly consumer staples, retailers, hotels, insurance companies, car manufacturers, just to name a few, if managed well, are likely to be fantastic long-term investments. Their businesses were swamped by the virus pandemic and, for the most part, are not victim to extreme corporate greed. Of course you will find the same patterns in all industries. Managers that fill their own pockets in lieu of putting the money to good use. If, however, you have done your research, know your investment, and are confident in the management's abilities and their business models, I would hold on to them. Tourism may flourish once this pandemic has subsided, insurance companies are likely to not really be badly hit by the coronavirus shock – and may even profit from an improving stock market when we finally see the end of the tunnel. Retailers and companies that provide luxury items such as cars may, if we do not enter a depression, enjoy fantastic revenue numbers. People will want to live again after having been confined for weeks and months. Companies such as Pepsico and Unilever are likely to report good numbers even during the lockdown period. We all need to drink and eat and it is more important than ever to treat ourselves to products that bring joy to our lives. Disposable income, as it can currently not be spent on other activities, will likely be channeled towards enjoyable grocery items that make this period easier to endure.
Would I sell shares during the downturn? I won't as I am not taking a short-term approach. On the contrary, I have been buying shares in recent weeks and will continue doing so. Every day we may be confronted with new Breaking News that ring in the end of the world, but in the long-run we will survive as a species. Wars, pandemics, epidemics, all these we have endured as humans, each time we have come back stronger.
The call as to sell, hold, or buy new shares depends on our conviction of the stability and potential of the company's business model. Call me crazy, but I bought Total the other day. Yes, the oil price is at a historic low, OPEC, Russia and Saudia Arabia aren't able to agree, even in times when a collective spirit should be everyone's priority. However, good dividends, a very low share price, a good business model, and no end in sight for humanity's thirst for oil has me convinced that Total is a good investment. I have made a similar call in other industries as well. If you believe that your investments are solid, their management able to learn from mistakes and prepared for the unexpected, then snap up more shares. Otherwise rid yourself of companies that are a burden to your financial wellbeing.
Most importantly: Stay safe and take the time to connect with those who matter most: your family and friends.
Top image from WHO