PANIC ATTACKS – Staying Calm in the Eye of a Storm
After one month into 2020, we are experiencing our first market panic attack. The market is digesting news from a respiratory virus (coronavirus) that just started in China last December, and it is assessing whether or not it will impact global economies and by how much.
A panic attack in the financial markets is a quick reduction of asset prices occurring during long term growing market trends. These unexpected panic events or rumors expand quickly and drag markets in a tailspin.
Usually, the severity of the panics events is measured by the impact on market levels ( -5%, -10% or up to -20%) and its duration (days, weeks, or months). Any market reaction of more than 20% down and lasting several months might be considered a bear market or a shrinking market.
After each panic attack, there is a corresponding rise to a new market record if the event does not become a bear market.
Panic Attacks are widespread in global financial markets. According to Yardeni Research ( www.yardeni.com ), a financial market of market analyses service, there have been 65 waves of panic attacks since 2009 (updated in October 2019) in U.S. markets using the S&P 500 market index as a proxy. We might be living the 66th event this week.
The permanent fear for investors is whether or not the downward movement is another panic attack or a real bear market, and that is where investors should spend time. As always, the right answer is never straight forward or natural, and involves plenty of risks.
The decision process to assess financial markets panic attacks looks like these:
· The first step, identify the causes of the fear; usually, they are apparent, but there are more elusive ones
· Second, understand if the panic event may or not derail the underlying market drivers fundamentals
· Third, forecast by how much and for how long.
· Last but not least, decide if the panic is an opportunity to invest, do nothing or divest.
The most challenging decision is to control our fears and contradictions before committing to risk or derisk money and avoid chasing trends either way. We should maintain an acceptable and reasonable return vs. risk profile giving your long term investment strategy so that we may avert unnecessary transactional costs and judgments errors.
Today’s panic attack, the coronavirus crisis has created considerable uncertainty among investors; sadly the human impact so far is still increasing, and the economic damage will depend on how long it will take to be resolved. After such an extended expansion for market prices since October 2019, we might expect a tactical retreat while investors assess the situation before rushing to take any positions.
Last week 17% of the companies of the S&P 500 market index had reported 2019 Q4 results. So far, Q4 2019 blended earning growth rate estimates (companies actual results plus forecast results) is -1.9% vs. Q4 2018, better than expected and improving. The blended revenue growth estimates are 2.9% a low value compared to the last five years but improving. (FactSet - John Butters January 24th, 2020).
During this week, 147 (30%) S&P 500 companies will report actual Q4 2019 results. At the end of the week, we will have 47% of the S&P 500 results accounted, although market action might be mainly focused on this panic news.
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