Coronavirus uncertainty ups the risk of negative market shocks

Markets are now very susceptible to negative shocks. Picture: AP

Australian stocks prices are rapidly heading into bear market territory down now 18.7 per cent from its February highs and heading towards a 20 per cent fall for the first time in four years.

In trading terms a correction is when stocks fall by 10 per cent and a bear market by 20 per cent but obviously it depends on how long the market stays down that determines the severity of the fall.

The last two times the market fell by 20 per cent or more was in 2016 and 2011 and both times it bounced quickly.

This time it’s different because it’s the coronavirus, compounded by the OPEC war, which has sent Woodside’s stock down 16.6 per cent to $22.01 a share – a four-year low.

The virus is spooking the market because no one knows how bad it will get.

But the reality is that it’s getting worse, and with 17 million people now locked down in Italy, the impact on the real economy is destined to be far wider than the China-only impact considered at the outset.

And it’s what people are doing to contain the virus that is hurting the global economy far more than the actual virus.

As the federal government prepares its economic response it is essential any recovery package is aimed at getting people spending and is economy-wide, not just the obvious sectors hit by the virus like tourism and education.

As investors look at the carnage in the share portfolio it is worth noting thanks to the growth in index funds around 25 per cent of the daily turnover on the local bourse happens in the last five minutes of trading.

This is the daily match, when liquidity is highest. High frequency traders tend to be absent and the market is relatively “clean”. Like many a basketball game, what happens for most of the day doesn’t matter much because the scores are determined by what happens on the bell.

Back in 2016 the market fell on concerns with Brexit in the UK and its impact on global trade. In 2011, it was Eurozone debt. They were both economic events.’

This time it is an unknown health impact which will hit the real economy. But just how hard is anyone’s guess right now. That type of uncertainty means any other negative like the Saudi-Russian spat at OPEC is catastrophised.