Five questions and answers about the current market situation
Nordea Asset Management’s strategists answer the most frequently asked questions we have received recently from our customers.
1. Why have the markets plunged?
The markets always overreact to bad news. Worries over the spreading of coronavirus are not only having a strong effect on the markets but also on the global economy. As a result of the measures taken to fight the coronavirus – people have been instructed to stay at home, gatherings have been banned and flights have been cancelled – the global economy has almost certainly entered a recession. At the same time, the economic forecasts are changing every day and it’s difficult to predict what the future holds.
2. How do you see the market situation going forward?
At the moment, economic data does not have much of an impact on market movements. It’s apparent to investors that the economy is slowing down and unemployment is on the rise. What’s most important right now are the measures taken to mitigate the effects of coronavirus on the economy.
As governments and central banks have announced new stimulus, there’s been less anxiety in the investment markets over the last few days. These massive stimulus measures and plans have already started to restore investors’ faith, and the stock market has rallied again. Eventually, the stimulus measures will likely be enough to turn the markets and the economy around but there are still challenges ahead in the short term.
3. What should investors do now?
There’s plenty of uncertainty around future economic developments, which means that there will likely be large one-day market movements going forward, too. Our advice to investors is to stick to their long-term investment plans and avoid selling assets in their portfolio if they don’t need to. Big drops are usually followed by big rallies, and it has proven costly in the past to stay out of the market.
As much as it may hurt now, this crisis, too, will be a good opportunity for investors to increase their holdings in the long run. We recommend diversifying your investments over a period of time and adding holdings to your portfolio in increments to benefit from the market lows.
4. What if the stock market crashes even further? Wouldn’t this be a good time to sell?
Only if you need cash urgently. Otherwise we would advise against it. Usually the biggest rallies take place in the midst of market turmoil, and you may put your investment targets at risk if you miss out on these rallies. Risk is part and parcel of investing, and sometimes risks do materialise. But in the long term, stock prices will eventually rebound, although it’s practically impossible to predict when.
5. How long do you expect this situation to last?
Coronavirus continues to spread outside China, including in Finland. It remains to be seen to what extent the global economy will be affected by the exceptional measures taken to fight the virus and by the stock market plunge.
But what we know for sure is that the central banks and governments are doing everything they can to support the economy and restore market confidence. The US Federal Reserve has redeployed all measures used in the last financial crisis and supplemented them with new measures. The European Central Bank, too, has raised its stimulus to a new level. The US government has also decided on a massive stimulus package and governments around the world have announced or are about to announce gigantic fiscal stimulus packages.