Canny View: Pandemic fear jolts markets, emergency rate cuts

Markets are designed to handle uncertainty, processing information in real-time as it becomes available. Photo / Supplied

US Fed makes 'emergency' rate cut to ward off coronavirus impact.

Bank of Canada cuts 50bps, to 1.25 per cent.

Reserve Bank of Australia cuts cash rate to 0.50 per cent to support the economy as it responds to the global outbreak

RBNZ will wait until March 25 to decide.

Panic is in the air. For weeks there was calm, markets have been moving upwards without a hitch and shrugged the coronavirus off with breaking little sweat, but then there is this sudden panic now. The question becomes: what now?

The world is watching with concern, and it is unsettling on a human level as well as from the perspective of how markets respond.

Endless words are dedicated to how to behave when markets go south. We regularly remind investors about the worst. Hopefully it means the worst is no surprise, but feelings happen. It's okay to have feelings, just remember the market doesn't care about feelings.

Markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see it happening when markets decline sharply, as they have recently, as well as when they rise. We can feel quite brave on the way up, but when the plunge happens it can be another story.

Some things to consider.

Media: The media will continue in their attempt to pump up the issue. "How many billions wiped" and "What it means for your KiwiSaver" will be common leads. Anyone bothering to scroll through such a cornucopia of despair would likely be in the fetal position by the end of it. Incendiary and pathetic stuff. Meant to bring out the worst.

Garth Turner, a Canadian financial adviser who was also once a journalist, wrote the following about the 1987 market crash. At the time he was business editor at the Toronto Sun.

"By the time I sat down to write my daily column the Dow had collapsed 22.6 per cent. In one day. The worst crash on record. More than 1929. Terrifying. As I wrote I glanced up at a crowd of co-workers standing around in mute shock. Then I sent my assistant to the newsroom library to dig up pictures of breadlines from Depression-era Toronto, which I irresponsibly published the next morning.

Nick Stewart

"Despite the historic disaster in the autumn, 1987 finished positive for the markets. Over the next two years it advanced 12 per cent and 26 per cent. No 1930s rerun. Everyone who sold on October 20 seriously regretted it. And I regret I lacked the experience and knowledge to do what my public-facing job demanded – provide a balanced and responsible commentary."

Such self-reflection is rare. There won't be any of it from the media for as long as the coronavirus lasts. Keep that in mind.

Markets: Don't lose sight that corrections aren't rare. New Zealand, Australia and the world share markets have been on a roll for a while. A genuine correction has been absent. That is rare. We've been in a good paddock. It's been steadily upwards until last week.

The S&P 500 dropped more than 11 per cent last week, a radical sell off for a market. But most years there will be a double-digit fall at some point. The average fall in this instance is 12 per cent. It's the price of admission.

It's important to take note of the 'flattish' years. Where there is a 0 per cent or slightly negative or positive return. An investor may have to ride a 17 per cent correction to get a 0 per cent return from the share market for that year. The reality of risk. Not pretty, but the best system we have. For some it's not palatable. It's why they don't invest. Alternatively, they seek refuge in the arms of those promising safety and returns without risk. That rarely ends well.

Your adviser: A humble enough adviser will admit they don't know anything about this virus, nor where it might take us. We can look at the past (as we have previously) as a guide for market impact, however it's no road map or satnav. The coronavirus is spreading faster than previous epidemics. Thankfully it appears less deadly.

Markets are unpredictable so advisers plan around lives and goals. Portfolios and financial plans are built around the good, bad and ugly. Keep in mind you won't have 100 per cent of your portfolio in share market funds.

For retired clients: We use effective cash management strategies. Taking advantage of harvesting and rebalancing opportunities. This is intended to quarantine cash for spending needs. It also aims to keep investors from selling down when markets are falling.

For accumulators or opportunists: We don't time markets, but a sharp fall or correction is better thought of as a discount. It's just not advertised that way. If you believe we will overcome and get through this, as with every other challenge humanity has faced, October's prices are now available in equities again.

And, some guesses on things that may happen.

We can't tell you when things will turn or by how much, but our expectation is that bearing today's risk will be compensated with positive expected returns. That's been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009.

There are no fixed dates on when things could get better. All remain guesses, but most importantly – take care of your health.

Nick Stewart is an Authorised Financial Advisers and CEO at Stewart Group, A Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

This article is prepared in association with Mancell Financial Group, Australia. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz