Why have the markets taken a knock?

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In a nutshell, the markets are driven by business activity which is supported by investor confidence. When businesses have investors, they can grow and create more value, which in turn encourages more investors. When businesses can’t run normally (like in the case of a global pandemic), investors fear they will lose money and pull out their investments or stop supplying more cash – which hits the businesses even harder.

The interconnected world we live in means we are all affected by movements in other countries. Trade shutdowns and lockdowns on the other side of the world will affect everyone here too.

Whether it’s directly linked to investments, supply of goods to trade, or indirectly through the price of petrol for our cars or the supply and cost of goods in the grocery stores. Some of us will be fortunate not to lose our jobs, but our economy will shoulder the burden of those who do.

Events that knock global markets are often referred to as Black Swan events.

The Black Swan theory describes an event that is unpredictable and which has a significant impact. For example, if we take the effects of COVID-19 (Coronavirus) and add it to an oil war, spice it up with local business confidence being low we have a significant knock to our economy.

The good news is that we’re all in this together. We’re not isolated, which means that we can work together with greater strength and resolve to solve the problems that will stem from a global Black Swan event. We see this in how banks and other large companies step in to assist consumers.

“Recently, the coronavirus pandemic has added uncertainty to global markets. No one can confidently state its impact or for how long it will last. It has already impacted our tourism sector, slowed down economic activity and caused growth forecasts to be slashed. This has led to a large sell-off of riskier emerging market assets reflected in the over 25% drop in the JSE Top 40 index within the last month. The latest global travel bans and the drop in the S&P 500 by over 20% are indicators of the virus’s effect on first-world countries.” 22Seven

When we see words like “economic crash” filling up our Twitter feed, we may rightly begin to worry about our investments.

We have two options: sell now and time our re-entry or wait it out.

The market does recover – this has been proven time and time again over the last 90 years. As it stands, recovery times are, on average, just under two years when in a bear market (watch out for a blog coming soon on bull vs bear markets!).

However, it’s difficult to predict share price movements. This is another reason to not sell investments, as it’s difficult to predict when to buy them back. A good strategy for most would be to continue with monthly capital injections.

(Ideas for this blog come from 22seven)

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