Prohibition and pandemonium amidst the pandemic

We are living in unprecedented times. It is day 19 of the lockdown in South Africa with hopefully only another 16 days to go. We are not sure what will happen thereafter but I have been impressed with Professor Salim Abdool Karim, chairperson of the Ministerial Advisory Committee on COVID-19. He appears calm, honest and highly competent. Unlike some hacks on WhatsApp groups and social media, who spread fake news and fear as fast as Trump can tweet. It is absolutely ridiculous to read investment banking  professionals proffer about the coronavirus as if they are experts in a highly specialized field of medicine. Even esteemed scientists such as Dr Tim Noakes is getting into trouble by mouthing off about stuff in which he is not an expert. The quality of journalism has also rapidly declined in recent weeks. I read a lot including Business Day, Financial Mail, Daily Maverick, Daily Friend and the Financial Times. I often find myself stopping reading a quarter of the way into articles these days. Perhaps it’s reading fatigue or perhaps it is the robots who have replaced some of the journalists.

I hope for a kickstart to the economy sooner rather than later as I fear for the long-term economic consequences of a prolonged lockdown. I fear for outbreaks of social unrest as people get hungry and frustrated. The ‘securocrats’ are not helping either by banning the sale of tobacco and alcohol. History teaches us that in the long-term, prohibition is a very bad idea! Ricardo Hausmann, the esteemed Harvard economist has referred to the moral dilemma of a 10% chance of dying from the virus versus a 100% chance of dying of hunger. That’s a bit dramatic but I get the point.

I follow stock markets closely for both professional purposes and to liven up debates in the classroom. Over the Easter weekend, I downloaded stock market data from the USA and South Africa and got busy with an Excel model – refer attached S&P500 and JSE ALSI data (2007 – April 2020) should you be interested in the market gyrations. I decided to focus on the JSE all share and S&P 500 indices over the period 2007 to 9 April 2020. The start date of 2007 was chosen because of my morbid fascination of pre-Zuma and post Zuma eras. Bit like BC (before COVID-19) and AC (after the coronavirus). The chart below tells an interesting story…

The stock market correction in late 2008, after the banking alchemists’ greed overtook their moral compasses, is evident. What is interesting is the red lines in March/April 2020. The extent of market reaction seems more severe than in 2008/2009 and that’s before knowing what the real impact that COVID-19 will have on global supply chains and trade in general. Many are speculating (those are the articles that I quickly glance over) but that is a pointless exercise except for those hard working executives running proper businesses.

I then extracted the 10 worst trading days on the JSE and S&P 500 (the index mimicking the 500 largest listed companies in the USA). In South Africa, the top 10 worst days were equally divided between the global financial crisis of 2008 and the current corona mayhem. The 12th of March 2020 (the date the World Health Organization declared COVID-19 a pandemic) was the largest decline in the ALSI over the past 14 years. Sadly, the JSE is down 17.8% year-to-date in 2020 or 75.5% in the case of Sasol (ouch, eina, bliksem). I checked some other noteworthy dates:

10-year government bond yields in South Africa appear disconnected to stock market movements, reacting more to local political events. The long-term bonds declined by 10.7% on 10 December 2015 after the infamous sacking of finance minister Nene. The yields declined 9.3% on 21 January 2020, presumably after that Bruce Whitfield interview at Davos? Unfortunately for you and me, government bond yields have deteriorated by around 18% in 2020 in response to the pandemic. The Reserve Bank keeps lowering domestic interest rates (thank you) but international investors make up their own minds.

The largest daily declines in the S&P 500 index over the past 14 years are set out in the table below.

It is carnage out there on stock markets. If you are currently invested in equity markets, do not listen to the noise. Your financial advisor is probably confused and rattled too. Like the COVID-19 virus, we are in for the long haul. Stay safe, wear face masks, practice social distancing and abide by the lockdown rules (even if you disagree with some of them). All the best from BeechieB.