Jordan: I won’t pretend that I pay much attention to the stock market. Let’s just say I don’t have much reason to do so. Occasionally though, it is unavoidable.
News Clip: Now with all the reaction to the coronavirus, world markets have tumbled. Bays rates suffering its biggest drop since the 1987 crash, while Wall Street plunged the most as the financial crisis. The loss is so steep on both sides of the border, that it actually triggered a trading halt. For the Fed and other central bankers the drop in oil prices is adding another complication is they try to gauge how the Coronavirus will impact the global economy.
Jordan: The fascinating thing about the reaction of markets around the world to COVID-19, it’s not really about dollars and cents. Yes, a lot of billionaires lost millions. And millions more RRSPs have taken a hit. But watching what’s happening here, even if you have no money in the markets, is a glimpse to how we all value risk. So what have we seen in the past few days and weeks? It’s different from financial shutters like the crisis of 2008. Where could the markets go from here? How far could they sink? And what will the world’s governments do to prevent that? And what happens beyond dollars gained or lost as a result of all this, whether or not stock prices surge again, when this is over? What happens, in other words, when a global economy comes down with flu-like symptoms? I’m Jordan Heath Rawlings. This is The Big Story. Mike Eppel is the senior business editor at 680News, he’s been busy the last few days. Hello Mike.
Mike: How are you?
Jordan: I’m doing well. Why don’t you quickly outline, and keep in mind that we are talking in the middle of the day, so stocks may do anything, but quickly outline, what have we seen in the past couple of days with stock markets and oil prices?
Mike: You have to go back actually three weeks. Because up until about the mid part of February, the markets were on fire. Everybody was buying everything. You could not lose money. It was the greatest momentum rally, not necessarily based on fundamentals, which turned out to be a bit of a problem. But Tesla was at a record, a Space-X and Virgin, Galactic, Apple, Microsoft, all these big companies, record highs, and coronavirus was starting its march, so to speak, in China. I kind of went, that’s peculiar. Why isn’t the market more worried about this? Well then as it started to spread, people kind of clued in and airlines were I think the first trigger where they started, Air Canada cut flights to China. So there was this wake up call that this was going to have an economic impact. And that started to sell off stocks. And over the course of the past three weeks, we have seen the biggest point declines and subsequent point gains on the benchmarks in history. Like there, there have been massive swings one day, huge selling next day, big buy back, and we are coming off now the subsequent largest slump ever on a points basis, I want to make that designation, for the TSX and Dow. Because when we look at on a percentage basis, it’s big, but not October, 1987 big, where the Dow in a single day dropped 22%. It’s massive. We’re talking trillions of dollars of market value. I don’t want to underestimate it, but again, I want to put it into some context. Uh, the TSX was down over 10%. Second biggest ever percentage decline.
Jordan: Explain what’s driving this. You touched on airlines.
Mike: Yes. Okay. So that was the, that was the first economic shock. That the tourism industry was seeing a major reevaluation. People weren’t traveling, companies, their supply chains were being shut down in China, ripple effect elsewhere, and then into Italy and Europe and potentially into North America. So that was the first wave of selling. And then what happened was the reaction from the market for what the Saudi Arabian government announced on the weekend. Last week they wanted to cut production to stabilize the oil market, which had seen a bit of a downturn. So they were holding meetings, uh, OPEC, the cartel and Russia, they’re sort of a new player in the global market, new ish, and they wanted to cut production. Well Russia had been playing ball for the better part of a couple of years. But then for some reason, they walked away from the table on Friday. They said we’re really not thinking about cutting production now. We think we can withstand lower prices. Have at it as you will. This incensed the Saudis, who say, okay, fine, we’re going to raise output in an already oversupplied market to record levels. We’re going to crush the low hanging fruit. Any company that produces at, say $40 or $50 a barrel, every barrel they produce is going to lose money. But the Saudis can produce it around $12 to $15, and we’re still around $30 and change, and the Russians are close. But that was the second hit, so to speak.
Jordan: Do we know if those two are connected? The sort of oil price wars and the coronavirus?
Mike: It is, because the first reason oil dropped was because China basically came to a standstill. And China is one of the largest buyers of oil. So oil prices dropped dramatically, and then this next thing developed at the worst possible time for the market, really. It’s like, really? You gotta do this now? Anyway, uh, they don’t seem to care. Cause this morning, again, they said starting next month, 12 million barrels. Russia said, okay, we’ll match that, or very close to it. You’ve got Canada in the mix, the US already at record levels, so we’re a globe that is going to be awash oil, which just kind of sounds gross, but it leads to lower prices, lower prices at gas stations, great for consumers, horrible for the industry. Guess what, Alberta is going to get hit again.
Jordan: Yeah. How efficiently can Alberta produce oil and what do they need oil prices to be at in order to not crush their economy more than it already is?
Mike: Most recently, the Teck resources project that was mothballed by Teck a few weeks back. Had a break even price, I think it was north of $50 per barrel.
Jordan: Okay. So significantly higher than where we are.
Mike: Higher than where we are. Now the established producers, Suncor and the others, they’re at a lower price point because they’re already moving commodities around. And this is why we’re talking about, you know, the oil market being a barometer of the global economy. And then you’ve got the travel and tourism industry in the mix, and why the markets have done what they’ve done. They’ve repriced risk. Um, they have lowered earnings expectations. Apple has already said that its sales in China dropped substantially in February. They’re going to drop again in March. Their supply chain has been hit. Again, Apple’s got deep pockets. They don’t have to worry longterm. They’re going to come out of this. But is the company worth $1 trillion? Not necessarily anymore, right? It’s all a repricing. And the pendulum that we see moves incredibly fast, because everything, and it was funny to hear commentators about how quickly markets dropped and then recuperated in previous crises, whether it was ’87 or the dot com bubble or whatever, whether it was Zika or SARS or MERS or any of these other things, the Russian ruble crisis, all of these would take months, if not years. Now we’re talking about weeks. And that’s what shocks and scares people because it’s like, what do you do?
Jordan: So just talk to me about people like myself, and probably like many people listening who don’t have tens of thousands of dollars sitting in stocks and aren’t, you know, directly impacted the second this happens when you look at a ticker and your money’s dripping away. What does the crash of the market mean for someone like me?
Mike: It’s psychological more than anything else because you’re not, you’re not selling, you’re not buying necessarily. You’re not cashing in for X number of years on your RRSP. So I mean, time is your friend and all of the old market adage is, but you see that and you say, wow. Do I want to go and buy anything big today? Do I want to spend money? You know, when you’re, when you are in a good mood, you’re more willing to be a happy consumer. And when you’re not, and you see, you know, all these negative headlines, you kinda kind of retrench. That’s the biggest problem. And again, from an investing standpoint, you know, it is so difficult to sell at the high and buy at the low. People do the inverse, right? Cause you’re thinking, Ooh, I’m missing out. When things are hitting records and then when things are on sale, you don’t want to touch it with a 10 foot pole. So now is actually the time, it’s not over yet. We still are seeing the virus ripple through, this is going to take some time. There’s no doubt about it. But companies that were priced way up here in the stratosphere a few weeks ago are at a discount. If you liked them, then you should love them now. And that’s the hard thing to get past.
Jordan: How much risk has the market priced in already? You know, we’ve seen Coronavirus spreading in North America, particularly, uh, so far, at least in the United States. Is a larger spread of that already priced into these drops or could it get even worse as it expands?
Mike: It could get worse, but we are already looking at the forecasters saying, okay, we are expecting that the economy will slow dramatically. Hopefully it doesn’t, but it’s likely going to, and they are already saying that interest rates, which were cut last week are going to fall that much further over the next two months. You know, the bond market, which is another one of these barometers of risk and worry and, flip side, euphoria um, we have seen bond yields dropped to all time record lows. Lower than what we saw during the financial crisis when banks were going out of business. Which is just, to me, remarkable. Now, as it was explained to me, the reason they’re lower than where they were then, because they never got back up to where they were previously. So you’re starting at a lower point and then dropping from that. So, okay, that kind of makes sense. But you know, we could see 0% interest rates in North America. This was something we were looking at when Greece was defaulting, right? And people were going, how does that work? You’re getting 0%? Yeah, because you’re buying that bond or whatever it is, because you think that the stock market or any other asset class is going to drop further than just keeping it at something that gets 0% and again, that adds to the concern and the caution, right?
Jordan: Right. How much of a role does politics play here? I mean, there’s a tremendous amount of discussion in the United States about the role the economy will play in an election year. And I’m wondering how individual governments, and especially let’s say, prominent world leaders, uh, how their response to the crisis might drive the markets and impact them.
Mike: Well, again, you’re talking about a health risk as opposed to a financial risk, more than anything. ’08 – ’09 was a banking industry crisis. This is, again, more of a natural disaster, I guess. I don’t want to over state it, but when you’ve got, you know, an entire country under quarantine, that’s kinda big. And how politicians handle that from a communication standpoint, it’s not as much, um, under that circumstance what the economy does, it is how the crisis is dealt with, because they’re kind of two different things now. Um, at the same time, we’re into budget season. So, you know, the federal government, our federal government, finance minister, Bill Morneau has said, wow, we’re working on scenarios where we could do this, that, or the other thing from a stimulus effort. To what end, I’m not sure, because again, that doesn’t, you’re not injecting money into a failing company per se. You’re just basically trying to shore up confidence more than anything. Maybe some short term tax cuts. That’s what they’re talking about in the United States for payrolls, for companies. It’s a different beast in the United States, of course, where there they’re not under a social health care net. You know, a lot of people have been going to work cause they don’t get paid if they don’t, we have that to some extent here, but also healthcare is not covered in all circumstances. So it’s, you know, how they dig deeper theoretically into debt to pay for some short term economic stimulus efforts remains to be seen. And I think, you know, the budget was supposed to be out here next couple of weeks. I have a feeling they’re going to delay that.
Jordan: Just to get a handle on what’s actually happening?
Mike: Yeah, cause actually, they got to revise it. They can’t, you know, that that’s the thing. If they’d go, if the Trudeau government goes with the current plan all talking about what they had been focused on and not account for, what is the here and the now, you’re gonna have grandiose plans, that’s great. But you’ve got to deal with, you know, cause it was, in ’08, the late finance minister, Jim Flaherty, under the Harper government came out with a fall economic update in November after the collapse of Lehman brothers, and the talk then was as not gonna affect Canada all that bad. And of course it was in the midst of everything. And he got, he just got hammered from a political standpoint for sort of being oblivious to the upcoming crisis that everybody else could see. So you can’t not do something in the here and now and just totally discount it. You have to be proactive rather than not.
Jordan: This is perhaps a dumb question. I’m not intending to make light of the situation, but there are some companies that are seeing their stocks spike from this, right? I imagine two weeks ago would have been a great time to buy Purell.
Mike: Yes. Kimberly Clark, Procter and Gamble, Costco, and Walmart. All of them up in the past week. Because what have we seen? People lining up to buy toilet paper. Um, yeah. No, they’re, in every type of crises there are winners and losers and right now consumer products companies are actually, because people are stockpiling, whether they need to or not. You know, the funny thing is you don’t have to go to the store. Last time I checked, you can have things delivered
Jordan: For the record and not to get off topic, I looked up a hand sanitizer on Amazon the other day to have some delivered and you would not be shocked to learn that there is some price gouging going on here.
Mike: I am not shocked to hear that at all. In fact, Amazon has been trying to crack down on that. They’ve been combing their website to get rid of third party sellers that are trying to gouge.
Jordan: My last question is just, uh, as someone who covers the markets, what will you be watching for specifically over the next few days and weeks to see uh, if this is the new normal, if this is a dip, you know, some people say, buy the dip, et cetera, et cetera, what are your key indicators, I guess?
Mike: It’s the, uh, the rate of the spread in various countries. It’s starting to slow in China.
Jordan: So you’ll be watching the virus and not the actual stocks?
Mike: Yes, yes. Because then you’d actually have, okay, we’ve passed the worst case scenario. So China’s starting seemingly, you know, getting back to normal. Um, Italy is now the next kind of hotspot. Do they contain it? Does it spread into Germany more so than it already has? Um, and then here in, certainly in North America is a big wild card. So that’s, you know, and also, over the next couple of weeks we’ll have companies, the airline industry is already doing this as of today, cutting, their forecast because they are shrinking capacity, big time. They’re taking planes and parking them because they do not have the need right now for flights to various destinations. So, you know, they’re all adjusting. Energy sector too. So, I think it starts with the virus itself, and then you kind of work out from there. And also government policy, they could slow down some of the the risk as well, I guess short term.
Jordan: Thanks for helping a financial moron understand this, Mike.
Mike: Not at all. It’s my pleasure.
Jordan: Mike Eppel, senior business editor for 680 News. That was The Big Story. If you would like more head to thebigstorypodcast.ca. You should know that by now. I shouldn’t have to tell you. You can also talk to us on Twitter @thebigstoryfpn. You can find our whole network at frequencypodcastnetwork.com and at @frequencypods on Twitter or Facebook or Instagram. And of course you can find us in your favourite podcast player. Every single one. Leave us a rating. Five stars. Leave us a review. Say nice things. Thanks for listening. I’m Jordan Heath Rawlings. We’ll talk tomorrow.
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