According to the World Health Organization (WHO), Coronavirus disease (COVID-19) is an infectious disease caused by a novel virus strain. Currently, there is no specific medicine to prevent or to treat the disease. The disease was initially localized in Wuhan, China, however, now it has become a worldwide issue. Recently, WHO declared COVID-19 a pandemic.
The disease is highly infectious, causing people to shun social activities. The world-wide effort to reduce the spread of disease has led to huge economic consequences.
Coronavirus (COVID-19) has had a grave impact on Chinese economy. According to Reuters, the Purchasing Manager’s Index (PMI) from the manufacturing and services sectors each fell to 35.7% and 26.5% and recorded a record low. South China Morning Post also reported that exports in the month of January and February together shrank by 17.2 % compared to the same period last year.
China has the second largest economy in the world. A lot of major international companies rely heavily on factories in China for producing parts for their final products. As such, the Chinese economy is closely related to the performance of these international companies. As the disease has become a pandemic issue, we have seen the economic impact on the global scale.
The coronavirus (COVID-19) impact on the economy is more pronounced in industries tied to travel and tourism. The prime examples would be the airline and hospitality industries. To prevent the disease from spreading further, many governments have declared lock-downs and encourage their citizens to keep social distance. Countries have begun to ban people from highly contagious areas from entering their borders. Recently, President Trump began restricting travellers from Europe to contain the disease.
The social distancing slows down spending in the given countries. The psychological burden from COVID-19 is expected to slow down major purchases, such as buying houses or cars. According to Investors Chronicle of March 18th, major real estate agents in the UK, such as Standard Life Averdeen, Aviva Investors UK Property, L&G UK Property Fund will suspend trading of their funds due to the coronavirus turmoil.
The world-wide spread of coronavirus diseases has caused huge declines of major indices, including the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500. The trend recently showed some recovery but has been a bear market. Anxiety among investors, the government’s reactions to the change, and the negative industrial impact of the disease are reflected in the market ups and downs.
The following is the daily change of the three indices from January to March 24th, 2020.
On February 24th, COVID-19 began to spread outside of China, causing a rise in anxiety and an economic slowdown. The Dow Jones Industrial Average dropped 3.56% (1031.61pts) to 27,960.80, S&P 500 3.35% dropped (111.86 points) to 3225.89. The BBC reported that this is the sharpest daily decline since 2018. The Nasdaq Composite dropped 3.71% (355.31 points) to 9221.28.
On February 27th, these three major indices again showed significant declines. The Dow Jones Industrial Average dropped 1,191 points (4.4%) and recorded its worst single-day point drop. This drop was down 10% from the recent peak. As the fear of coronavirus spreads, the volatility index also increases.
On March 12th, President Trump announced a travel ban on people from European countries for the next 30 days, with possible extension. The announcement hit industries in the travel/leisure business very hard. The Dow Jones Industrial Average showed huge volatility: the peak was 22,837.95 and the trough was 21,154.46. It closed at 21,200.62, recording a 9.99% drop (2,352.38 point). The S&P 500 dropped 9.51% (260.74 points) to 2,480.64, and the Nasdaq Composite dropped 9.43% (750.25 points) to 7,201.80.
On March 13th, President Trump declared a national emergency. The Dow Jones, Nasdaq, and S&P 500 rose 9.36%, 9.35%, and 9.29% respectively. However, on the 16th, they all dropped:: 12.93%, 12.32% and 11.98% respectively).
The prolonged anxiety in the market and the responses from the government has increased market volatility. The market started to recover on the 24th. The Dow Jones Industrial Average increased by 11.4%, which was the biggest gain since 1933.
Gold is considered a safe asset in an unpredictable and volatile market. The anxiety from coronavirus also triggered the demand for safe assets in anticipation of an economic recession and a market crisis. Prior to March, gold prices were stable. Beginning in March, however, even gold prices showed a huge volatility, closing at $1,477.90 on March 19th. The price slowly recovered, then rapidly went up to $1,696.10 on the 24th. On the 26th, it is priced at $1,636.60.
Oil prices were not an exception. The price dropped as demand went down since the virus negatively affected the airline industry and travelling business. Many factories also closed down to control the spread, resulting in a decrease in oil demand. These reasons caused the oil prices to drop to $20.83. BBC News reported that it is the record low since June 2001. On March 26th, the oil market closed at $23.05.
On march 12th, Bitcoin dropped 50% overnight. Cointelegraph reported that Bitcoin and cryptocurrencies have shown a high correlation to the US stock market, that the 50% percent drop is related to the 9.99% drop of Dow Jones Industrial Average. It also analyzes that the drop reflects investors’ diminished preference for high risk/ high return assets. The 50% drop was the biggest daily drop during the last 7 years. On March 26th, Bitcoin traded at $6,716.44.
John Bollinger, a crypto analyst, left the following comment on this Twitter as a response to the sudden price change.
“Bitcoin fall victim to the COVID-19 panic. I truly did not see that coming, I thought it might act as a safe haven asset.”
– Yahoo Finance Mar 24, 2020.
Eric Thies, a cryptocurrency trader and technical analyst shared his thoughts as follows.
“Today’s massive dump in both the crypto markets and the traditional markets was very interesting to say the least. While many would say it is solely due to the coronavirus, looking into it further and you will see this does not show the usual signs of a recession. This may be because of the war on oil that many people have not heard about due to the news of the virus. (…)
One thing I think that is overlooked by many crypto investors is the money flow in this new market cycle. This is the first market cycle where the weight of the money will potentially be held by institutions. That means that Bitcoin is now tied to the traditional markets, and far from being a safe haven when it comes to the emotional cycles of humans, and our instinct to save our money when we become fearful.”
– Coin Telegraph Mar 13, 2020.
Meanwhile, Joe DiPasqual, the CEO of BitBull Capital, a crypto investment firm, shares a different view.
“Bitcoin’s recent price action is primarily a result of the coronavirus outbreak affecting global markets and driving investors towards the safety of cash, (…)
With this sharp decline, Bitcoin’s potential as a safe-haven asset is being questioned, but we believe it is too early to seek any correlations between Bitcoin and other asset classes.”
– CNBC Mar 13, 2020.
Rightfully so, many investors feel fear and anxiety due to the pandemic. Instead of losing your ground, think of your portfolio. What is your goal? Do you want to minimize losses? Is your portfolio designed for a short-term time frame? You need to set a clear goal for each of your portfolios.
1. Diversify your portfolio
If you value risk management, build a portfolio of relatively stable assets when market volatility is high. This leads to portfolio diversification as a way to keep your investment safe, and a balanced investment portfolio with a mix of different assets. This is a strategy to minimize overall risks low by mixing assets with different levels of risks. You can face a variety of risks by investing, and diversifying your portfolio has the advantage of avoiding systematic risk. (Systematic risk refers to macroscopic risks such as Inflation risk and Currency risk.)
2. Focus on long-term goals
It is almost impossible to predict short-term market movements. Perhaps the coronavirus may keep the market weakened longer than we hope. When the problem that causes high volatility in a market is resolved, it often regains its normalcy and rebounds rapidly. It suggests that investors with long-term plans need not worry too much regarding the recent market changes. Here is the view of Jonathan Raymond, Quilter Cheviot investment director.
“ The world always carries uncertainty and there is enough of it about. The trouble is that [stock] markets generally trend upwards over the longer term, even though it’s not unusual for them to fall by 10% over a short time. (…)
Anyone investing in the stock market should be thinking in terms of five years or more, rather than weeks or months, and that is the context through which to view the current turbulence.”
– Which Mar 27, 2020.
3. Don’t panic
You may be sensitive to news or rumors about the coronavirus. However, you should not make your investment decisions based on these feelings. That can result in panic selling that often leads to missing good recovery opportunities and may only result in greater losses. Most professionals advise investors not to panic during uncertain times.
Yahoo Finance advised Warren Buffett not to try and time the market. On CNBC Warren Buffett said: :
“I don’t think anybody knows what the market’s going to do. I think you … know whether you’re making an intelligent purchase at a given price”
– Yahoo Finance Mar 10, 2020.
Meanwhile, on March 3, according to Barron’s article, Warren Buffett’s Berkshire Hathaway bought 976,000 shares of Delta Air Lines for $ 45.3 million on Feb. 27. This was the day when the Dow recorded the biggest drop in history.
Are you afraid of the coronavirus? It can be scary,and we completely understand. If you are, remind yourself not to panic. Also, spend some time to look after your portfolio so that it can be well-prepared for financial risks. Lastly, stay alert and pay attention to various scams and scams using panic and confusion caused by coronavirus.
If you’re bored at home, check out your portfolio for free.
Want to review the performance of your crypto portfolio using proven metrics from the traditional financial industry for free?
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