In the second half of February, stock markets experienced a severe blow. Within a week, they were down 10 to 20%.
To respond to the current situation, we have called Robert Rolih, author of the international bestselling book on prudent investing The Million Dollar Decision.
Robert says shares have experienced such a fall for two reasons. The first reason was the panic over the rapid spread of the Covid-19 virus, and the second was that the shares had been growing for 10 consecutive years and that a major correction was urgently needed and natural.
He continued, however, that the Covid-19 virus was extremely unfavorable to the global economy in the short and medium term. Many more people die from the new virus than the flu. We do not know exactly how it spreads, it can even be transmitted by people who do not show signs of the disease. So you could have it, but you wouldn't know it, because you would feel perfectly healthy. This may mean, however, that the number of infected is much higher than official statistics and that the virus is much more prevalent than we think it is. Robert adds that the fact that many people are sick or unable to work because of the measures is also a significant fact that affects productivity is that between 10% and 15% of patients need intensive hospital care, which is a huge burden on health systems.
He also goes on to say that this does not mean that it will end the world. ''We have gone through a lot of crises in the past and so will we. In the short and medium term, however, current developments will have a major impact on the global economy and, through it, on the lives of each of us. ''
Would you go on vacation to Italy now? Probably not!
As the virus spreads, we are less and less choosing to travel. The tourism industry is one of the largest in the world, with $ 5.7 billion in annual traffic. About one in ten of the planet's inhabitants work in tourism. The effects of tourism are already felt mainly due to the cancellation, especially in the first phase of tourists from China.
Several events have also been canceled, the Mobile Technology Congress in Barcelona, and more recently the Geneva Motor Show, so business travelers remain at home. As a result, some have already predicted that business travel will be less than 30%.
And when the tourism industry suffers, so do the related industries. Tourism is also a part of retail, technology, etc.
Of course, a very strong influence of the new virus will also be known in the supply chains.
Robert Rolih points out that the effect of the closure of Chinese factories has not yet been detected on world markets because most of the products produced there are now on board ships on their way to the United States or Europe. However, it will show up in a month or two, when we can expect a lot of problems in the functioning of supply chains.
Delayed delivery of one critical component may close the plant indefinitely.
This in turn can lead to a domino effect. Workers lose their jobs, employers lower their salaries, profits for companies are smaller, countries collect less tax, and so on.
“That is certainly why we will witness rapid government responses. The US Central Bank will again cut interest rates and bring some incentives to the market. However, it is unlikely that the intervention will have the same effect as in the past, as financial policy tools are not designed to be an antiviral medicine and will not get people back to work, ” Rolih concludes.
And how will it be in the future?
Robert Rolich is optimistic. He believes that there will be a solution to every problem we are facing at this moment: “But we will not solve the Covid-19 virus problem overnight. A rapid stock market recovery is unlikely to occur unless there is an unexpected outcome, such as the development of a vaccine or medicine. The disruption to the global economy is real and will have a domino effect on our lives.
If the virus continues to spread relatively smoothly and we do not find an effective solution, the capital markets will continue to appreciate. But we also expect more volatility on them. This does not mean, however, that we need to get rid of equity funds as soon as possible, as flights are long-term and equity markets overcome all crises and problems in the long run.
However, if the stock markets fall by 30 or even 50%, this could be a great opportunity to buy a cheap stock once a decade. Just like in 2009.
Remember that when you buy stocks, you buy companies. These, in turn, innovate and create new value in the market. In addition, companies are able to adapt to any change in the market. When stock prices go down, our instinct should not be to sell, but to buy. Global stocks have historically been the best investment for money if we do it for more than ten years, and the 99% chance is that it will continue to be so in the future. “