Diane Francis: On the markets, all bets are off – USA DAILY NEWS

Diane Francis: On the markets, all bets are off

The world is reeling from two interrelated catastrophes: the stock market crash and the pandemic that’s silently spreading around the world. Both are scary, but manageable, but their duration is a big unknown — think months, not weeks. Prepare for lots of trading halts, too.

On the markets, it’s been a hair-raising few days for those who haven’t been through this before. But as the direct and sagacious Jim Cramer of CNBC fame put it this week, “it’s not the bubonic plague,” and it’s a case of riding out the situation for as long as it takes. How long that is has varied from meltdown to meltdown and is based on how long it takes to remedy the underlying causes.

The worst of the lot was the 1929 crash, which largely resulted from an untamed market and Wild West economy. As a result, it took a decade worth of sacrifices and the Second World War to mend fully.

The next American stock market collapse in October 1987 was due to rampant speculation and leverage, junk bonds and few regulatory tools to control the financial panic in time. Markets eventually recouped, with circuit brakes and regulatory controls in place, and took off for 12 years.

Some crises have been localized and political. In Canada in 1995, the markets and our currency crashed in the lead-up to the Quebec referendum. A narrow “no” vote fixed the situation and avoided the catastrophe of a unilateral secession planned by the separatists that would have caused an economic crisis. As a result, the market normalized in the following months.

In 1999, the gigantic dot-com bust took place due to excessive valuations and unjustified prospects involving many tech stocks. The market recovered in the years to follow, after financial firms and investors became more discerning and cautious.

In 2008, the “Great Recession” collapsed the U.S. financial system — and the global banking system — due to high-risk trading on Wall Street, and leveraging based on fictionalized or fraudulently priced mortgage-backed securities. This malpractice was only corrected by massive interventions on the part of governments and their central banks, and it took years to repair the damage.

Now this. Last week’s coronavirus crash is the first global collapse caused by a pandemic. By contrast, markets virtually ignored the onset of SARS, Ebola and avian flu, but this pathogen is so contagious that the world’s economy, or large portions of it, will be shut down for months.

The disease is upending market fundamentals to reflect the cost of a runaway crisis on workers, companies, governments and economies worldwide. Values will only start to improve once there is evidence that the spread has been arrested or virtually eliminated. That will take at least a year or more, until there is a vaccine in place.

The only hope is that all countries quickly adopt the draconian template to arrest the contagion that China, and now Italy, have devised. This includes a shutdown of all social gatherings, schools, workplaces, markets and modes of transportation, along with forced testing and quarantines, and a war-like effort to expand health-care facilities.

Scientists still don’t have a treatment, but know that non-medical interventions, such as those China and Italy have imposed, do appear to stop the spread. This will only end when there is a vaccine and widespread immunity among those who have contracted and survived it.

As for the markets, they will move in alignment to facts concerning the number of cases, fatalities, locations and government policies. It’s notable that the S&P 500 was up 20 per cent some 12 months after the outbreak of SARS, which was also highly contagious and dramatically more lethal.

Compliance with new restrictions is not an option, but a necessity. And until good news finally follows the bad, all bets are off.

Financial Post