Has your honesty ever backfired

Crash of the stock exchanges: has the crash prophets come?

"Crash prophets are like stopped clocks," goes an old stock market adage, "they are right twice a day." In other words, notorious Kassandra callers miss the good phases between these rare events - and these have been extremely profitable on Wall Street over the past decade. Most recently, however, the crash prophets shot up like mushrooms - and now they have a new virus by their side. Has your hour come now? Or has the worst been over with the price slide of the past few days?

The fact is that Wall Street and, to a certain extent, other stock markets have seen a very long upswing since March 2009 - the Dow Jones has so far quadrupled since the low after the financial crisis. This makes the current bull market, at 131 months, the longest in the history of the US stock exchanges, although earlier upward phases usually brought in less income. In addition, companies in the Dow Jones Index have to pay an average of more than 20 times the annual profit despite the recent price declines. So Wall Street is still expensive, which makes it prone to price corrections.

Skid marks in business

In addition, the coronavirus has developed into a pandemic, which will leave corresponding slowdowns in economies and corporate profits. The first quarter has already been ticked off: In February, the leading economic indicators in China fell to the lowest level ever recorded, and a number of global corporations such as Apple have already issued profit warnings.

For the further development, on the one hand, it will be decisive how long the restrictions remain in China and how strong they will be in other countries. On the other hand, what the strong monetary policy measures of the central banks look like and whether fiscal policy can be harnessed to the economic cart with increased government spending. In the best case scenario, the economic weakness will be limited to the first quarter, when the stock markets could resume their upward trend after the current correction.

Backfired

However, the quick shot by the US Federal Reserve, intended as a sedative pill for the financial markets, backfired. Since Tuesday's rate cut by half a percentage point to the new range of one to 1.25 percent, unusually between the regular rate cuts, it tended to fuel investor concerns. In the past, the Fed only acted in this way in crisis situations - like in 2000 after the Internet bubble burst or in 2008 after the Lehman bankruptcy.

But what can central banks do against the coronavirus? For economist Gerhard Winzer from Fondshaus Erste Asset Management, the Fed's interest rate cut is suitable for alleviating the tightening of the financial environment such as falling share prices or higher yield premiums for credit risks. This is intended to curb negative feedback from falling stock prices on economic growth.

Wrong signal

Wolfgang Habermayer of the financial consultancy Merito describes the Fed's rush action as the "wrong signal". The central banks could only stimulate demand, but the problems are to be found on the supply side, for example due to quarantine measures or broken supply chains. "If that continues for another quarter, it won't look good," says Habermayer. Then the probability of a recession would increase and the stock exchanges would be threatened with a bear market, i.e. a phase in which prices would fall by at least 20 percent. Habermayer advises investors should behave like drivers in heavy fog: wait and avoid risks.

US economist Nouriel Roubini assesses the situation more pessimistically: He assumes that the corona virus will lead to economic and geopolitical crises, i.e. it will lead to a global disaster. The stock exchanges could collapse by up to 40 percent. Some recent book titles sound similarly dramatic. The highlight among them: The biggest crash of all time the two financial advisors Marc Friedrich and Matthias Weik, who predict severe economic upheavals by 2023 at the latest.

It doesn't have to be that bad, of course, especially since such a financial book should also find huge sales. Or would you rather have a work entitled No crash in sight buy? (Alexander Hahn, March 5, 2020)

correction

The positive scenario: the adverse effects of the coronavirus are concentrated in the first quarter and then dissolve again. In this case, the economy could partially make up for the failures and return to growth in the second half of the year. For equity markets, this would be a scenario similar to the late 2018 sell-off, when recession concerns triggered a sharp price correction. The fears proved unfounded and the stock markets quickly made up the losses. Right now, however, it looks more like the effects of the virus will last longer.

Bear market

The neutral scenario currently also appears to be the most likely: The spread of the coronavirus is continuing and is also causing economic losses in other regions, which will continue at least into the second quarter. In this case, a phase of negative growth would be the result in some countries, the stock exchanges are threatened with a bear market in which the price level has fallen by at least 20 percent since the high. Bear markets can only last a few months or two and a half years, as they did after the Internet bubble at the turn of the millennium. Wall Street was valued much higher then than it is now.

Stock market crash

The most negative scenario would prove the crash prophets right if the corona pandemic leads to a real economic crisis and the stock exchanges crash like after the Lehman bankruptcy in 2008. This would be alarming, since the central banks have almost run out of powder this time. Only more extreme measures remained, such as expanding securities purchases to include shares, as is already the case in Japan, or distributing helicopter money to the population, as was first practiced in Hong Kong in February: each citizen received the equivalent of 1,200 euros. The good news: At the moment, there is little evidence that this will actually happen.

On the subject:

Coronavirus: US Federal Reserve surprisingly cuts key interest rate by half a percentage point

Coronavirus destroys $ 4 trillion on the stock exchanges

Dow Jones saw the biggest drop in points in history