What are ingredients for a market disaster? Look no further than the three words above: oil war, pandemic and travel ban.
The combined effect of all these three fuels uncertainty and fear in the markets.
Just moments ago, as I was preparing to write this post, the circuit breaker for the Dow Jones was triggered as it plunged 7%.
A market circuit breaker is a mechanism which once an index or individual stock drops below a certain threshold, the trading halts temporarily to allow people to cool down. This is to prevent panic selling.
Currently for the US stock market, there are 3 levels of circuit breaker:
- 7% drop – the market stops trading for 15 mins
- 13% drop – the market stops trading for 15 mins
- 20% drop – the market stops trading for the day
Let us take a closer look at the recent events.
Oil War
The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 14 countries that cooperates to control the prices of oil by limiting its supply.
Over the weekend, Russia which had an alliance with OPEC, decided not to cooperate to limit the supply. In response, Saudi Arabia, in attempt to show who is boss, decided to slash prices and increase production.
While cheaper oil prices would mean cheaper costs to us consumers, in the form of cheaper energy and petroleum products, the oil industry will be severely affected from such a drastic drop. Companies in the oil and gas industries may face bankruptcy.
The SPDR S&P Oil & Gas Explorer & Production ETF (XOP) plunged on Monday.
The market overall decided to plunge together along with it, triggering another black Monday.
The heavily oil dependent global economy is already severely ill due to COVID, and we are not ready for another battle between Putin and the Saudi Crown Prince.
Pandemic
It was only a while ago, I wrote a post on 25 Jan 2020 on pandemic and panic: will coronavirus crash the market.
Back then, the purpose of the post was to tell everyone to calm down and not panic as I did not know how widespread the outbreak will be nor its impact on the global economy. I never expected my title to become true.
The devastating effect of COVID-19 can be summed up with this: simultaneously destroying supply and demand, causes death and fear globally.
WHO declared COVID-19 a pandemic on Wednesday as the number of cases went over ~127,000 cases and ~4,700 deaths.
Western countries are starting to realize that they might be inadequate to contain the outbreak of COVID in their countries.
We start to see that as Italy rises to be one of the second worst infected countries outside of China.
US has also realized that they might not have the right test kits and may already have COVID patients among them, undetected.
Unlike China, who has the ability to enforce total city lockdowns, the US does not have the ability nor even the incentive to get their citizens to quarantine themselves. Many of the lower income groups cannot afford to take sick leaves nor have adequate medical insurance coverage and may have to foot the bill. In China, testing and treatment for COVID is free.
Perhaps, the declaration of pandemic will cause more countries to take this seriously and cooperate to curb the spread of this virus. Hopefully, the other countries can follow and learn from China’s template and keep the virus under control.
Europe Travel Ban
As if the economic impact of COVID was not devastating enough, the president of United States decided to announce a travel ban from all European countries for 30 days, unilaterally.
Already, the airline industry is already bleeding from lower tourism and cancelled global events, it does not need another travel ban. Already several airlines has gone bankrupt and we may see many more to come.
I understand that if the travel ban prevents further spread of COVID in the US, then it might be beneficial. However, the point here is that Trump likes to take unilateral decisions and blindsides everybody, just like the assassination of the top Iranian general.
Uncertainty is really not a good recipe for a strong market. Who knows which country will issue a travel ban next.
Certainly not a great year for airlines and the tourism industry.
Conclusion
Nobody knows how the markets will react in the coming weeks, months or years. It might recover fast or it may drag on for many years.
The recent market crash has been attributed to various geopolitical and a black swan event. We are still recovering from the US-China trade war, infected with the COVID pandemic, watching political figures wage oil war against each other and having an unpredictable US president. Not to mention, UK might leave the EU without a deal.
No wonder investors are unsettled.
It is during the toughest times that we learn to be more resilient.
It is during times like this that we see more cooperation and coordinated efforts from countries to work together to solve these problems.
So hopefully we will all emerge out of this stronger.
As for the meantime, I will continue to invest regularly in adherence to my recession plan no matter what happens.
Fatty's Finance 