Markets still lagging behind reality

The penny still hasn’t dropped. The markets have been lagging behind reality since the beginning of this crisis.

Article updated: 25 March 2020 8:00am Author: Michael Baxter


On March 16th this year, a report from Imperial was published. It was disturbing reading. I believe it was this report that led to a change in approach to the Covid-19 crisis from both US and UK governments. The markets still haven’t cottoned on.

The markets are reacting to governments reacting. As a result they have been failing to price in the reality of this crisis from day one.


First of all, the implications of exponential were not understood. Back in early February, plenty of evidence circulated that Covid-19 infections were doubling every few days. As I wrote here, back on February 3rd: “If new cases were to continue to increase by 30 per cent a day, that means doubling every three days, by the end of March everyone on the planet would have had the condition.”

Back then, like everyone else, I was very uncertain what all this meant, there was a complete lack of facts upon which we could make judgements. But exponential means what exponential means — that at first numbers are small, barely noticeable, then they become more common and then the numbers start increasing at a terrifying rate.

Yet, during this period, mainstream media and social media were full of reports telling us not to worry, that cases were small. People compared the danger represented by Covid-19 with risk of being in a serious car crash. Indexes tracking US consumer confidence during this period were still sky high. As recently as February 19, the S&P 500 hit a new all time high.

On 27th February an upbeat President Trump said that Covid-19 will disappear — “like a miracle.” The following day he likened it to hoax — promoted by Democrats. It was the following day that he began to take it seriously.

As for the markets, they did fall sharply in the last week of February, but even as recently as March 4th, the S&P 500 still stood at a level that as recently as mid-December was at an all time high.

The markets’ understanding of what Covid-19 meant was lagging behind President’s Trump’s, but his understanding lagged behind any objective appraisal of the facts.

Don’t get me wrong,  hardly anyone understood exactly how serious this was. But senior politicians and then the markets were near the back of the queue in gaining this understanding. However, there was a sector that did get a good idea early on.

Back in February 13th, an article in VOX, headlined: “No handshakes, please”: The tech industry is terrified of the coronavirus.” 

I detected an air or sardonic satisfaction in the article — the sensitive souls have nothing better to worry about.

In fact, if you work in tech, the idea of exponential and what it means is drummed into you. I believe that is why Silicon Valley grasped the seriousness of all this first.

The second wave of reality

But things have moved on. The second wave reality hit when there was a growing understanding of the lessons of Spanish Flu — which by the way, did not originate in Spain, in fact a farm in Kansas is a contender for the origin.

Spanish flu hit in three waves. The second wave was the more serious. If Covid-19 is like Spanish Flu, it will be at its most widespread in November.

It was the dawning reality of this that prompted governments to react — it underpinned the British idea of gaining herd immunity. The markets reacted to what governments did, and ignored the evidence that had already been in circulation before government announcements.

The Imperial report stated: “The major challenge of suppression is that this type of intensive intervention package – or something equivalently effective at reducing transmission – will need to be maintained until a vaccine becomes available (potentially 18 months or more) – given that we predict that transmission will quickly rebound if interventions are relaxed.”

That scared governments. They reacted and markets fell some more.

New evidence

More recent evidence suggests that there is a big danger with herd immunity— the more people get it, the greater the risk Covid-19 will mutate, meaning immunity no longer applies, and any vaccine that appears to be effective and at the testing stage, may no longer be relevant.

So this is what must happen. The lockdown must be as drastic as possible, in every country where there are cases of Covid-19. In the UK this lockdown should have begun several weeks earlier than it did. This clip from Yes Minister tells the story nicely.

Then, when three things have happened, the lockdown can be relaxed. Those things are:

  • a fall in the infection rate down to low double digits.
  • availability of millions of testing kits (that is tests to see if you have it, not had it)
  • Technology for tracking movements of people who have it and who they have been in contact with. (This will have privacy implications, but there is no alternative.)

This state of affairs will need to continue until there is a vaccine available to everyone.

The markets have not priced the above conditions in yet. That is why I think markets have a lot further to fall.

What can investors do?

An enormous buying opportunity will emerge, but not yet.

In the meantime, UK investors could benefit from the cheap pound by buying into UK listed companies that they may have considered investing in under normal conditions, that do most of their business in dollars and euros, and sell products that may prove especially popular during this crisis.

UK listed companies that are big exporters to the US and which sell products that should remain popular in this crisis include: GlaxoSmithKline, Johnson Matthey and Mondi.

Mondi especially, as it’s packaging products may prove especially popular if online shopping surges, looks interesting.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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