Stock Market Meltdown - Coronavirus or Coincidence?
By Dale Gillham | Published 16 March 2020
In this week’s report Dale discusses the volatility in the Australian stock market and the heavy losses suffered in the market since the All Ordinaries Index achieved a new all-time high of 7,289.70 on 20 February 2020.
Market meltdown unprecedented
Imagine it’s the summer of 2024 and you are sitting outside reading the financial news and drinking a cup of coffee when an article catches your eye titled “2020 Market Meltdown Not Due to Corona Virus” but…
While what I have just written may not eventuate, it is worth thinking about. We need to remember it was only 15 trading days ago that our market made a new all-time high, and now two weeks later the stock market has technically crashed. In 1987 the market had only fallen 10 per cent in 20 days and it wasn’t until day 21 that the big move down unfolded. During the GFC, the market fell 25 per cent plus over 93 days and in the 1929 crash it took over 30 trading days to fall the same amount.
The difference between those times and now is that all of these crashes were caused by rampant speculation and excessive leveraging, yet three weeks ago neither of these situations were occurring. While we are being led to believe by the media that it is the coronavirus that is driving the market down, I believe there are other factors that are not being reported that is driving the market to fall so fast and so deep. Be it political or some other reason, the more the market falls the more unlikely it is being driven by a coronavirus outbreak.
If we look at the coronavirus in China, reports are indicating that the aggressive measures taken by China have slowed the spread of the virus for over a week now, despite this not being reported in the Australian media. So, they are potentially past their peak and a return to normality is likely over the next few months. With the vast majority of coronavirus cases being reported in China, this suggests the rest of the world is likely to follow suit very soon.
While the significant pull back in the market was unexpected, it does present a lot of opportunity to profit when the next rise occurs. It is important to remember that all markets ebb and flow, and the market will rise again. So while everything may appear as doom and gloom right now, being fearful will not help investors. Instead, you would be better off getting prepared to profit when the dark cloud lifts.
What are the best and worst performing sectors?
Given the Australian stock market has continued to fall, all sectors are down with the best performing sector being Consumer Staples, which is down over 8 per cent followed by Utilities down over 10 per cent and Healthcare down over 11 per cent so far this week. At the other end of the scale, Energy has been the worst hit again given the fall in oil prices over the past week. Currently, Energy is down over 26 per cent followed by Industrials and Materials, which are both down over 16 per cent.
Looking at the ASX top 100 stocks, the best performers include Xero, which is down just under 1 per cent followed by Domino’s Pizza and Coles Group, which is down just under 6 per cent. Not surprisingly, the worst performers come from the Energy Sector with Oil Search down over 41 per cent, Santos down over 35 per cent and Woodside down over 27 per cent so far this week.
What's next for the Australian share market?
Let me say that the current move down is not even close to normal market behaviour, and I dare say no expert could have predicted the voracity and speed of the current fall. As any market commentator will tell you, we are sharing our best guess based on research that we can confirm at the time. Right now, what I know is that the stock market is falling and eventually it will stop falling, but the question is when.
It is normal for the market to bounce and retest highs and we should see this occur any day now and for this to last for one or more weeks. I also know that there is strong support for the All Ordinaries Index at 5,171 points. Given this, it wouldn’t surprise me if I was talking about some strong rises on the market next week, however, for now investors are better off protecting their capital and waiting for the dust to settle before making any decision to enter the market.
For now good luck and good trading.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.