BUILDING GREAT FORTUNES DURING BEAR MARKETS
The US S&P500 had receded almost 27%1 from its recent peak as the longest US stock market bull run officially ended last week.
It then rebounded by more than 9%1 on 13th Mar 2020, but it is unlikely to sustain.
What action has the Federal Reserve (FED) taken?
FED then took emergency action by cutting interest rates by a full percentage point on 15th Mar – the benchmark US interest rate is now in a range of 0 to 0.25 percentage points2. FED had not taken such a drastic measure since the last financial crisis in 2008. It also announced plans to buy $700 billion in government securities2. These were a repeat of similar measures taken for the last crisis by cutting rates and printing money. The US stock futures however still tumbled.
When FED last cut rates by half a percentage point on 3rd Mar2, the market only rallied for 15 minutes before falling again.
This showed that the monetary policies were failing to take effect, and the market was quite pessimistic on the back of news that Europe had recorded the highest number of deaths in a single day3 with more than 167,700 infections all over the world4, and the spread outpacing China’s4. Europe was also declared by The World Health Organization (WHO) as the “epicentre” of the pandemic which originated in China3.
With the interest rates cut to near zero and a Quantitative Easing (QE) programme already in place, would the world run out of ammunition should the stock market rout extend itself?
And are safe haven assets such as gold still safe?
According to Investopedia5, “a safe haven is an investment that is expected to retain or increase in value during times of market turbulence”. They are traditionally instruments like US government securities, the US dollar, gold, defensive stocks and cash.
As a safe haven asset, gold price had started rising steadily after May last year amidst global uncertainty. However, gold price fell almost 8% on 9th Mar1 itself. This was due to margin calls, which also happened during the last crisis and gold price also fell at first (when the markets crashed). Subsequently, it recovered to peak at $1,9214 in 2011, rising more than 2.5 times especially with the increased flow of credit from the money printing. The current situation with regard to gold isn’t unlike the last crisis, thus gold is still a good hedge.
So what’s a margin call?
“With a margin account, you are able to trade with borrowed funds, (and) you can enter larger positions than you would normally be able to; therefore, trading on margin can magnify both wins and losses. However, just as with any loan, you must repay the money lent to you by your brokerage.
A margin call occurs if your account falls below the maintenance margin amount. A margin call is a demand from your brokerage for you to add money to your account or close out positions to bring your account back to the required level4.” Investors had thus sold the bullion to cover margin calls as equities and oil price crash, overshadowing the demand for gold2.
How would you take advantage of this market situation?
The measures taken by FED have seemingly been ineffective. This is also due the presence of COVID-19. Even though the crunch is ahead of us and nobody knows how long the situation would persist, cracks would start to appear in the credit market should this last over a longer period of time. However, the virus is unlikely to still be a concern in 5 or 10 years. This financial shock is primarily a health emergency instead of a crisis that arose from within the financial system.
Once the COVID-19 spread is contained, it is most likely that the markets will rebound, especially with the massive liquidity that has been and will be pumped into the market. Gold price will most likely be the first to climb before the market recovers.
While applying the Dollar Cost Averaging (DCA) strategy, it is also imperative to ready your investible assets.
There had been 26 market corrections (not including this year’s) since World War II with an average decline of 13.7%2. Recoveries had taken four months on average2, which is a very short duration of time.
We have 75% of our portfolio in capital preservation assets currently and we will progressively increase our allocation to equities as the market continually up its discount to us.
It’s advisable to stand by your funds by putting them into your investment account so we can help you leverage on the opportunities in a timely manner.
As a wealth manager wisely mentioned, “It’s (during) these times that great fortunes are built, not bull markets. But you have to buy the right companies, you have to have an appetite for some pain and misery and you have to be patient6.”
Do speak to your Unicorn consultant if you have further queries.
Note: We will increase the frequency of our communication with you to weekly during the current turbulent times. We will continue to communicate monthly with you during usual times.
4.The New York Times
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