“Corona virus”
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I was not satisfied with the trades I made during the so-called Corona Shock, and upon reflection, I realized I hadn’t adequately prepared mentally or anticipated my actions for investing under such circumstances.
Overwhelmed by the situation of a global pandemic, I fell into a state of paralysis and couldn’t even manage to take a tentative selling position in the face of declining stock prices. It’s a regrettable story.
From this reflection, I decided to anticipate as many situations as possible. The first step I realized was to review the stock prices and other circumstances during the COVID-19 pandemic.
The world is in a state where another pandemic could occur at any time. This seems likely, as Mr. Bill Gates has said, “There is a 50% chance of another pandemic occurring in the next 20 years,” and I personally agree.
The purpose of reviewing the situation during the Corona pandemic is to create a foundation for what kind of investment activities should be undertaken in the event of another pandemic.
Corona Shock
From an economic perspective, the Corona Shock is generally considered to have started around February 20, 2020. The SPX500 plummeted by about 34% until late March, but by August, five months later, it had recovered its losses.
Looking back, if we only consider stock market fluctuations, it doesn’t seem like such a drastic crash.
Comparison with Other XX Shocks
For context, here are the S&P 500 declines and the number of trading days it took to recover to the same level in other historical, global XX shocks:
The Great Depression (starting October 24, 1929)
Decline: 86%, Days: 7,256
Nixon Shock (starting August 15, 1971)
Decline: 48%, Days: 1,899
Black Monday (starting October 19, 1987)
Decline: 29%, Days: 402
Dot-com Bubble (starting December 2000)
Decline: 49%, Days: 1,808
Lehman Shock (Global Financial Crisis) (starting September 15, 2008)
Decline: 57%, Days: 1,379
Corona Shock (starting February 20, 2020)
Decline: 34%, Days: 117
(Reference: https://www.visualcapitalist.com/sp-500-market-crashes/)
The Great Depression from about 100 years ago stands out, but the Lehman Shock can also be considered a significant crash following it.
What’s noteworthy is the number of days it took to recover. The Great Depression took more than 3.5 times longer than the second-place Nixon Shock. While all other crashes took years to recover, the Corona Shock recovered in about five months. I remember being quite surprised by the speed of this recovery.
Foreign Exchange
From February 2020, the yen and the Swiss franc soared. Against these currencies, the US dollar and the euro declined. Notably, the EUR/USD fell, meaning the euro was sold off more. This trend continued for about eight months before significantly reversing and completely retracing its steps.
The dollar was relatively more bought, but the yen (JPY) and Swiss franc (CHF) were bought even more.
The Swiss franc and (at that time) the Japanese yen were considered safe currencies, which is why they were bought. The euro was sold off more than the US dollar, likely due to fundamental reasons such as the pandemic hitting Europe first and Europe’s already weakened economy.
Bonds and Commodities
As a result, both bonds and commodities generally declined. Like stocks, it can be said that it’s better not to get involved with them during a pandemic.
While it’s understandable why commodities were sold, the reason for the selling of bonds such as government bonds is attributed to the global spread of COVID-19 and the prevailing mindset of “better to have cash for risk reduction.” Indeed, bonds seemed to have been bought in the early stages of the pandemic.
Even commodities like gold, which are said to be safe assets and strong in times of crisis, were sold off for the same reason as bonds, namely the “cash is king” approach, along with the decline in US stocks.
However, it is true that gold recovered quickly. As the pandemic seemed to be heading towards resolution, gold could be considered a better investment option than stocks, depending on the price levels at that time.
What to Do in the Next Pandemic
Preparatory Actions
It goes without saying that the actions depend on the scale of the pandemic and the danger of the virus, but first and foremost, one should sell stocks and commodities, including bonds. I remember that the drop in stocks, especially airlines, was notable.
If one were to buy instead, it would likely be in essentials or healthcare, but pharmaceutical companies would depend on their response to the pandemic. And once the pandemic seems to be subsiding, sell immediately. This approach is similar to what we saw with Pfizer’s (PFE) stock movement.
Indicators of Market Bottoming Out
Obviously, unless there’s a special reason, there’s no need to buy stocks during a crash. It’s better to wait for the market to bottom out… I thought so during the Corona Shock but ended up doing nothing as I was too late. Looking at the decline rate of U.S. stocks, I should have had a different approach.
If we average the decline rates of the historical crashes mentioned earlier, (86+48+29+49+57+34) ÷ 6 = 50.5%, so it might be wise to start buying gradually once the decline exceeds about 30%, and invest a substantial amount if it reaches 50%.
Crashes not caused by financial institutions and where financial institutions suffer relatively less damage tend to recover faster. This was evident in the recent pandemic. I often heard during the pandemic that ‘the financial system is not impaired.’
Of course, this only pertains to the case of this pandemic, but it’s undeniably a case study.
Buying Swiss Francs
As for foreign exchange, I would unhesitatingly buy Swiss Francs (CHF). The yen, on the other hand, seems to have lost its function as a safe currency, so it’s currently difficult to consider it as an option.
Summary
Sell all assets including stocks, bonds, gold, and other commodities, and convert them into Swiss Francs. Start tentative buying when the decline in U.S. stocks exceeds 30% and invest substantially if it reaches 50%. As a hedge, it seems wise to also hold some U.S. dollars.
Writing this, I realized, it’s a huge task, especially for those who have a constructed portfolio. Essentially, this means temporarily dismantling the portfolio to the extent that its original structure is no longer recognizable due to significant changes in proportions.
For those engaged in index investing or similar accumulative investments, it might make sense to retain that portion, and naturally, the approach will be case by case.
To elaborate further, this is just one model case based on the best response during the Corona Shock that started in 2020. It’s important to add that this method is not a one-size-fits-all solution for the next pandemic.
