Coronavirus crash? We're doing it, but why now?

COMMENT:

Just to be clear, this is a crash.

We're doing this.

Yesterday's 30 per cent plunge in oil prices and the shockwaves, which knocked as much as eight per cent off global markets, is historic in scope.

We may now be witnessing the sudden death of one of the longest bull runs in modern history.

Ironically, the crash came on this bull market's 11th birthday. March 9, 2009 marked the lowest point for Wall Street in the wake of the GFC.

Several markets in Asia and Europe, including Japan and Italy, fell into bear territory yesterday - a fall of 20 per cent from the most recent peak.

At last count, Wall Street's S&P500 was down 18 per cent from a record high set just nine days ago.

In Australia, the ASX200 closed down 19.6 per cent from its recent high.

New Zealand's NZX50 - less closely linked by commodities to the fortunes of oil - has fared better.

It is only off about 12 per cent from February's peak (including this morning's 4 per cent fall on opening) ... so far.

There's an old broker saying: bull runs don't die of old age.

History will no doubt call this the coronavirus crash. But, of course, the virus doesn't care.

It remains as contagious and dangerous as it was yesterday, as it was three weeks ago when markets were surging to record levels.

Why should markets plunge now? Why did they entirely shrug off the global epidemic until late February?

Covid-19 has spread across the globe in a worrying manner but not to a degree that was wildly unforeseeable a month ago.

There's never anything particularly rational about the way markets plunge, when they finally go.

Analysts still argue about the causes of the big crash in1929 when markets fell 13 per cent in a day.

And the Black Tuesday crash of 1987 which saw markets fall more than 20 per cent.

When Lehman Brothers bank collapsed in September 2008, taking the sharemarket with it, the cause was a credit crunch which had started almost a year earlier.

Technically, the catalyst for the big sell-off this week was a geopolitical stoush - an entirely manmade creation.

Saudi Arabia and Russia have decided now is the time for a showdown over oil production.

Unfortunately, it's come at the worst possible time for the world's financial sector.

The only consistent theme when markets crash is a collapse of confidence.

When that collapse of confidence follows a period of over-confidence - sometimes called irrational exuberance - the meltdown is always worse.

There are plenty of smart people in the financial sector who have believed stock markets were in that territory over the past year or so.

Pumped up by low interest rates and trillions of dollars of baby boomer retirement savings, they have soared to unprecedented levels.

New Zealand's NZX-50 index is up more 300 per cent since 2009 - a fact that should bring some context and comfort to those watching the falls this week.

We can also take comfort that, so far, this is not a banking crisis.

Unlike 1929 or 2008 this crash isn't coming from the heart of the machine.

Unless we see it spill over to credit markets then we should remain well placed for a sharp recovery when we finally see a let-up in the spread of the coronavirus.

But how long that lasts is not yet clear.

We should brace ourselves for more high drama on markets. It is the nature of these things.

We shouldn't panic. Long-term investors should stick to their course and ignore their KiwiSaver balance for a while

And we should keep washing our hands.