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How virusness kills financial markets - 01.03.2020

In the last working week of February 2020, the Dow Jones index set a historical anti-record: its value fell by more than 4000 points.

In relative terms, this is about 15% - just on the verge between the "correction" and the "collapse" of the market.

At the same time, the price of many "popular", "outperforming" and "promising" stocks fell by 20-40% or more - and all this happened during 7 trading sessions, in record time for the US stock market.

A similar pattern was observed on exchanges around the world.

One reason is called the cause - the spread of the coronavirus COVID-19.

In connection with this, a reasonable question arises: Is a new disease and its consequences worth $8 trillion lost by global financial markets ($5 trillion in the US and $3 trillion in the rest of the world)?

Let's get it right.

As of March 1, about 86,000 people were infected with the new virus in the world, of which about 80,000 were found in China. Coronavirus patients have been identified in 53 countries, and the World Health Organization considers the risk of a global epidemic to be very high.

At the same time, the majority of patients suffered from the disease in mild and moderate form, and the mortality rate from a new disease among people under 50 is 0.2%, which is quite comparable to mortality from ordinary flu.

In absolute terms, a new disease is a minor nuisance that has happened in a world where 150,000 people die every day.

However, financial markets reacted to the news of the spread of coronavirus in a very painful and completely inadequate scale of the new disease.

In this regard, it is appropriate to recall another flu pandemic that happened 100 years ago. This happened in 1918-1919, in the last months of World War I and in the first months after it’s finished. Then 550 million people fell ill in the world (about 20% of the world's population), in some countries the number of cases reached 40% of the population. That epidemic claimed the lives of 50 to 100 million people - several times more than died on the battlefields of the First World War.

And - yes - in the two years that the flu virus raged over the planet, the Dow Jones Index rose 40 percent.

What is now going on differently than 100 years ago?

Now information about events is scattered across the planet thousands or even millions of times faster than at the beginning of the twentieth century. Accordingly, the volume of available information is thousands or even millions times higher than hundred years ago.

One hundred years ago, the chain of events was something like this:
- an event occurred - after some time its consequences were revealed - newspapers wrote about these consequences - after some time the events and their consequences were recognized by market participants - and finally, market participants bought or sold securities, and prevailing sentiments determined the direction of movements of stocks’ prices and indexes.

In particular, the Dow Jones index fell by 33% in 1920, but this happened after the flu pandemic ended and its negative effects, such as a decrease in demand for goods and services and a sharp decrease in the number of working-age people, took place.

Now the consequences of any event can be simulated on a computer. Then it is just enough to post the obtained result is in the form of an emotional informational message in the Internet. Such information reaches the target audience in a matter of moments and is able, with a successful combination of circumstances, to provoke inappropriate actions of market participants and unexplained jumps in prices and indices.

In other words, in the 21st century, it is not necessary that negative events actually occur - it is enough that someone imagines them and tells others about it.

This phenomenon - when information based on assumptions changes the direction of price movements in financial markets - has yet to undergo a detailed study. As of now, it doesn’t even have a proper name. We propose to use the word “virusness”, like virus publications, which in a short time gain a huge amount of views and readings.

“Virusness” is a completely new phenomenon and cannot be explained logically. However, because of it, work in the financial markets is at risk of becoming a game, and with an equally sad outcome for all players.

Can a private investor be saved from “virusness”?

Fortunately, yes.

We have already published number of articles on protected investments - alternatives to stocks, bonds and real estate. Investments in protected instruments bring the same income as underlying assets, but at the same time they are free from “virusness” and provide a constant capital gain.

With protected investments, creating personal capital is predictable and calm and save energy for other activities.

Even those who prefer intrigue, unpredictability and the “swing” of traditional financial markets will feel much more confident, knowing that part of their capital is growing regardless of the ebbs and flows of the stock market.

Contact us to get more details on the protected investment instruments available at the moment.

Thanks for your attention and see you soon!