Hedge Clippings | Friday 06 March, 2020

The market's recent chaos and panic as a result of COVID-19 has been nothing compared with that experienced in the toiletry aisles of Australian supermarkets this week. For a while it had Hedge Clippings both amazed and perplexed, and, being faced with shelves devoid of both baked beans and toilet paper (surely there can't be a connection there?) a little miffed.

Leaving aside the miffed feelings - we weren't caught short ourselves, but had to wait in a long queue amongst those who obviously were, and were seemingly expecting to be for some months or even years to come, while all we were there for was for a litre of milk and a packet of hot cross buns. However, we were perplexed as to why the nation had become so obsessed, when our understanding of COVID-19 was that it was a respiratory virus, not a gastric one.

All was explained when we recalled Maslow's "Hierarchy of Needs" which, for those not familiar, or who can't recall it, states that the basic physiological aspects that man (or woman we assume) needs for the survival of his/her body are, at times of stress, more important than others such as (in ascending order) safety, love/belonging, self-esteem and finally self-actualisation.

Recalling (actually reading) further, Maslow lists in the basic physiological list aspects which include food, clothing, air, shelter, and the homeostatic processes such as excretion!

So there we have the answer. No one was (or is, as the shelves are still bare) being irrational after all, they were merely reverting to their core hierarchy of needs which have been there since we crawled out of the swamp.

Which, based on the behaviour of some of those we witnessed, in some cases might not have been so long ago.

What has all this got to do with fund performances you might well ask? Probably not much, except that last week we mentioned the "F" word, Fear. And with good reason, as fear of the consequences of COVID-19 is clearly driving markets.

A few weeks back we referred to Chris Watling's work at Longview Economics which over time found a clear correlation between company earnings and the performance of the S&P500. Put simply, the earnings of many companies are, or are going to be, under extreme pressure and it therefore follows that so too will share prices.

With the ASX200 down almost 1,000 points since its most recent high, and the Dow off around 3,500, investors are probably being much more rational than the shoppers in the toiletry aisles of Woolworths, Coles or Aldi.

We at Hedge Clippings, however, will maintain our sense of proportion, control and decorum. Until and unless of course COVID-19 threatens the supply of a decent bottle of Pinot Noir. That's when you'll see real fear, and resulting panic.