These days the search for safety proved more difficult than usual. In the bond markets, the buy-sell-spread in trading opened up enormously, a sign that there were more sellers than buyers. Even the US money market showed the first signs of stress, forcing the US Federal Reserve to pump additional liquidity into the market. Gold also came under pressure in the course of the day, losing 4% at times. This is a clear sign that more and more investors need to delever and liquidate parts of their portfolios.
In exceptional market situations, investors ask themselves what they should do now. We recommend:
We work along these recommendations in our asset management mandates. The first recommendation is the top priority. This is particularly important in the case of implementing changes to the portfolio. It may mean to delay making changes until a favourable window opens up. After yesterday's slump on the stock markets, for example, we believe that today is a good time to add stocks to the portfolio as decided by the investment committee this week.
This week will go down in the history books, that much is clear. On Wall Street the second largest loss since the so-called Black Monday in 1987 was recorded yesterday. And that comes on top of big falls on Monday and Wednesday. The losses since mid-February have already totalled over 30% in many stock markets. The EuroStoxx 50, for example, is down 34 %.
The average of all bear markets was exactly the 34% that has already been reached in Europe. A bear market is a loss from the peak of more than 20%. Averages, however, are such, that the extreme values are smoothened. But what makes the current correction outstanding is its speed.
Neither during the Great Depression of the 1930s nor in the financial crisis did the US stock markets fall so sharply in such a short time. In both cases, however, they only finished at just under minus 50 %. The low point was recorded after about 10 and 28 weeks respectively. The current sell-off has been going on for only four weeks. This shows that an extreme situation can still become more extreme.
At the same time, the past teaches us that even the biggest crises end at some point. In our view, central banks and governments around the world will do everything in their power to support the economy.
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