Making Sense of the Market Volatility

Prepared by Michael Chalmers, Certified Financial Planner® B.Bus FP, DipFP

What's the bottom line?

(Source: Karl Richards, The Behaviour Gap)

The bottom of the Global Financial Crisis in March 2009 was not when US Jobs growth recovered, but when the rate of decline tapered. Jobs were being lost at record levels but people could see the start of the turnaround and recovery.

In March 2009, job losses in the US reached a record monthly high of 800,000 during the crisis, however the number of job losses reduced to 695,000 in April 2009; the trend had turned.

Monthly US Job Losses (followed by history of Bear Markets and Bull Markets)

China & South Korea have already started to show signs of them getting on top of Corona Virus – with the rate of growth (new cases) having almost stopped. This is a turnaround of 3 months from initial outbreak to now. We are expecting for the trends in China and South Korea to be replicated globally given the level of shut-downs. While the virus is not expected to disappear altogether, the rates of infection will decline because, either we get ahead of it (likely) or everyone becomes infected. Either way the growth of Corona Virus will stop at some point.

Whilst investors are largely guessing, the market will remain choppy with large movements up and down, times like this are not the time to panic.

We all know Buy Low/ Sell High is a recipe for investing success. What most are unaware of is that our emotions trigger us in the opposite direction. Fear is the strongest motivator often triggering people to sell low. Greed is almost as strong, triggering people to buy high. Our emotions trick us to do the opposite of what our brains know.

Asset Pricing

Asset prices are a function of future cashflows. An estimation of what cash will be received each year from either dividends, rent, interest or royalties. Investors then make an assessment that factors risk and any possible maturity value. When markets are stable this process is involved but can be assessed by professionals.

In a government-imposed shutdown the estimation of future cash-flows can vary wildly. Estimates of:

  • how much cash is the asset losing during the shut-down?

  • how long will the shut-down last? and

  • how much cash is likely to be available after the shut-down ceases?

all become some form of educated guess.

What do we know?

Things at some point return to normal, because the population is still growing irrespective of the pandemic. Life goes on for the survivors – it always has. Once cashflows become predictable again asset prices will return to being an assessment of future cashflows. The temporary damage gets repaired and then life can go on. This is demonstrated in the chart below, showing the US market downturns, recoveries and expansions.

(Source: MorningStar direct)

When will things get back to normal?

The early hotbeds of China and South Korea are seeing the growth of the Pandemic slow almost to a halt. They had more imported new cases than locally grown. At their current rates and with continued close monitoring and isolation they appear to have it beat. It’s just a matter of time for the new cases to be cleared.


The rest of the world is rapidly attempting to adopt the model given to us by China and South Korea. Assuming the it can follow suit and slow the rate of growth of the infections then I would expect that asset pricing will start to return to normal. The Stock market is typically a leading indicator, it panics before situations are truly bad and it gets bullish when situations are still bad but appear to be changing course.

Key Take Outs

Fear is the enemy, ignore your gut, don’t crystallise losses, you need to ride this out.

The opportunity comes when the situation seems darkest. We are not there yet.

At the very least be patient and stick to fundamentals.


Morningstar Direct Research

Carl Richards –

Any advice or information in this publication is of a general nature only and has not taken into account your personal circumstances, needs or objectives. Because of that, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.

Past performance is not a reliable guide to future returns.

The material contained in this article is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate.

Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.