RIO DE JANEIRO, BRAZIL – It is too early to assess the impacts of the coronavirus pandemic on the world economy. But in stock markets, the damage is now the fastest ever since records have been kept – and the decline may continue.
This assessment is part of a report released by XP Investments. According to the text, the stock market indices of different countries had never before dropped between approximately 30 and 40 percent in a period of only two weeks, as they have now.
In the 1929 crash, the Dow Jones index in the United States took 35 days to enter a bear-market, which is defined as a drop of over 20 percent.
In the 2008 crisis, the market took more than four months to drop more than 20 percent, from May to late September. According to XP, this time it took only 16 days.
The report is based on the markets’ performance between the end of Carnaval (February 26th) and last Thursday, March 12th.
In this interval, the IBOVESPA dropped 36 percent, the EWZ (Brazilian stock market index in dollars) dropped 44 percent and the S&P 500, of the US stock market, dropped 27 percent.
On March 13th, the stock markets were up again, but the IBOVESPA still accumulated a 15 percent drop from Monday, March 9th to last Friday – the worst performance in a week since the 2008 crisis.
Stock markets may drop further: what to do?
Fernando Ferreira, XP’s chief strategist and the author of the report, says in the text that “the mood has deteriorated very quickly”.
“While after Carnaval, most investors looked at the ten percent correction as an excellent starting point, the mood changed after the stock market corrected another twenty percent since then. The message we now hear from managers and market players is one of caution and with a slant that the market could drop further”.
In view of this scenario, XP’s recommendation is for caution. “We haven’t even started to see the impacts of the coronavirus crisis on economic and business data in any country, not even China,” the report says.
The development of the pandemic is also uncertain, as are the measures adopted by governments to try to contain the spread of the virus. On Saturday, the US President added the UK and Ireland to the list of countries with restricted travel to the US.
“In our perspective, if the fear that the world will go into a sharp recession is confirmed, we believe that the Brazilian stock market could suffer even further,” says the XP report.
Analyzing past crises, the report points out that the IBOVESPA could drop “at least another 10-15 percent, reaching 62,000-65,000 points”.
Clearly, this is a possibility. “It is always very difficult to estimate the point of equilibrium, at which the markets stop collapsing and begin to rebound. In 2008, after the S&P 500 fell 42 percent by October, the index recovered 24 percent by the end of the year, before going down another 30 percent in 2009 and finally finding the valley”, says the text.
Given this scenario, what to do?
Since stock prices are lower than a month ago, XP suggests, for investors looking for opportunities, that they buy over time, rather than all at once. “Having an average price eases the effects of high volatility.”
“Crises pass and, in the long run, being a partner in companies that have good foundations, in promising sectors, and that are managed by a strong group of managers is always the winning strategy”.