Weekly Wrap from Pythagoras Investing 15 March 2020

Lunatics have taken control at the asylum.

At times like these it is important to go back to basics so I am taking a helicopter view today. 

What has happened to the world stock markets in the last few weeks?

Firstly, we have had the spreading influence of the coronavirus which has been shown to be very infectious and is moving around the world with ease.  The impact of the virus has been more severe than an influenza as it has shut down factories, supply chain, supply lines and interrupted business much more broadly than the flu. 

It is nevertheless still a virus which will pass.

We know that the oil market was affected by a manipulation perpetrated by Saudi Arabia.  It caused a fear that oil was falling due to a global recession – which caused panic selling this week.  See here to read the OPEC blog.

Nevertheless it was a manipulation of the oil price by Saudi Arabia which caused the panic.

Where are we now?

We are in the grips of hysteria. 

Given China’s experience with the coronavirus and the time taken to contain it, we now know roughly how long it may take to get through the worst, country by country.  Therefore we can extrapolate that the coronavirus has become more fully understood rather than a complete unknown. 

There will be further earnings downgrades to listed companies and broad-based effects on businesses generally. 

However, stock prices are painting a very dire picture – effectively pricing a 25-30% reduction in earnings, forever. Stock markets typically look at least one year into the future. Currently this isn’t the case but in a few months analysts will be focussing on 2021 earnings – where the impact of the virus will be smaller. 

Right now we see fear and an unpreparedness to be rational in the world’s stock markets. The earnings forecasts may be downgraded and economic pain may ensue for a few more months, but at some point rationality will return to markets.   When it does the market will begin to look at positives and Mr(Mrs) Market will be happy again – by comparison to manic.  The wholesale selling of all stocks across the board must be exacerbated by redemptions from passive funds, causing them to sell all shareholdings – which will also cease.

Right now we feel that the massive reaction to a virus and oil price manipulation is well and truly overdone.

Like to know more? Call Michael 0419 726 223

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