Fastest correction in history, what to do now?

The SP500 carried out the fastest correction in its history (- 10% in 6 sessions), surpassing that of Black Monday in October 1987.

Prior to the correction, indices indicated extreme levels of complacency, moving higher in a parabolic bubble-like pace. US indices had risen as much as they did between 2016/2018, in twice less time. Moreover, 2016-2018 was a healthy bull market supported by global synchronized growth, which can hardly be argued on the current market conditions. US manufacturing was just starting to recover from punitive trade war, growth remains sluggish in Europe, and now the coronavirus may be seriously delaying the global growth pickup markets were so eagerly anticipating for the end of 2020.

This is an abrupt wakeup call, and as always when the vast majority don’t expect it, it leads to large panic induced moves.

Is it time to jump back?

While monetary or fiscal measures may try to revive confidence, the impact on the market could be short-lived. Central bank tools, such as cutting rate or injecting liquidity may become supportive at a later stage but will have little effect to stop pandemic fears. Patience is the key word today.

The number of new cases peaked in China after 2 weeks before decelerating, and the epidemy only just started to spread in the rest of world, hence we should probably expect another week or two of negative headlines and volatile markets.

While the coronavirus should most likely have a temporary impact on the global economy, the magnitude and length of this impact is still a grey area. Chinese activity has decelerated sharply with property sales in the 30 major cities down nearly 90% compared to a year ago for the month following the New Year.

As more people stay at home, travels and large-scale events get cancelled, global consumption could be significantly hit, in turn negatively impacting corporate earnings. Major tech firms such as Apple and Microsoft had already warned they would miss sales guidance, due to slowing demand and supply chain disruptions, and these warning came prior to the recent virus spreads outside of China. More guidance downgrades will follow, and investors will most likely remain cautious until they get a clearer idea of the extent of the damage by the next quarterly release in April.

Generally, a correction phase lasts 10 to 15 days at the very least; we are in day 6, and there are no technical signs of basing at the moment. Additionally, Mutual Fund positioning into stock is still far from the lows of 2018/2019 and pre-crisis levels

It’s probably too early to buy, but not too late to sell. Some shares have performed so well in the past year and half, that taking a 10% hit is not hard to do.

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