Well if anyone could accurately predict the markets they would be a very rich person indeed. The truth is that no-one in the world knows for sure what markets will do but we can look at certain patterns and indicators to surmise what may potentially happen.
And to be honest, it’s probably not the news that you are hoping for if you have stock market investments. We’re sorry not to be able to bring you the news you want to hear BUT read to the end to find out why you should still stay invested.
2020 – the story of the market so far
Markets kicked off 2020 on fine form with record highs after a decade-long bull market. The S&P 500, for instance, hit its highest level ever of 3,386 on 19th February 2020. At that point, for those of us living outside China, the prospect of lockdown seemed preposterous, we could kiss and hug our friends, go to the theatre or the cinema and eat and drink wherever we pleased. Those were the days!
From 20th February 2020 investors started to wake up to the fact that the virus was spreading and the prospect of lockdown, worldwide layoffs, failing businesses, disrupted supply chains, tanking oil prices and a major global recession loomed rapidly into view. As the devastating effects of Covid-19 became clearer, stock prices tumbled by almost a third in just over a month with the S&P 500 hitting a year-to-date low of 2,237 on 23rd March.
Since then they have climbed back up to their current level of 2,819. So that’s positive right? Share prices are on their way up….
2020 – what will stock markets do next?
If only it were that simple. The percentage drop from the high to where we are now is 17% which is not great however it does compare favourably to the two previous recessionary drops this century:
Between 2000 and 2002 the dot.com bubble triggered a 49% peak to trough fall in value of the S&P 500
Between 2007 and 2009 the financial crisis triggered a 57% peak to trough fall in the value of the S&P 500
That sounds good too…?
Sadly most economists don’t agree. The World Trade Organisation has predicted a drop in global trade worse than in the 2008 crisis while the IMF is predicting a worse recession that since the Great Depression of the 1920s and 30s.
So if the early signs are good, why are the media warning of a worse recession than either of these two events?
Why are share prices likely to fall further?
The fact is that the fallout of this pandemic is likely to be a recession of greater magnitude and broader in scope than either of those we have lived through to date this century.
Many industries from travel and tourism to restaurants, retail, sport and entertainment have juddered to a near halt and millions have lost their jobs all over the globe, in the developed countries of Europe and North America as well as in emerging markets.
So while stock prices have risen since their low on 23rd March it is probable that they are going to zig zag their way even lower still before a sustained rally. This is an entirely normal way for stocks to behave.
Returning to the dot.com bubble and the financial crisis, the best comparisons that we have, it’s interesting – if a little depressing – to look at the time frame over which the peak to trough falls occurred:
Dot.com bubble – the 49% peak to trough fall in value of the S&P 500 occurred over 929 days
Financial crisis – the peak to trough fall in value of the S&P 500 occurred over 517 days
As more and more data is released over the coming months concerning business activity, employment, company earnings etc, and none of it is looking like it will be positive for a while, the likelihood is that we are going to see multiple ups and downs before the markets reach the bottom with none of the ups anywhere near the high of the 19th February.
And while that’s hard to take, we think it’s best for investors to have a realistic picture of what is likely to happen rather than hold out false hopes that the worst is already behind us.
As uber-investor and billionaire, Howard Marks, so succinctly put it ‘We’re only down 15% from the all-time high of Feb. 19…it seems to be the world is more than 15% screwed up.’
The truth is that economies cannot be turned around overnight and the natural cycles which characterise the stock market are going to take time given the severity of the current crisis. We are still very early in this particularly painful cycle which will feature multiple rounds of drops and rebounds. What is reassuring is that history tells us that markets have always been cyclical and always recovered eventually.
Should I bail now?
The short answer is no, and the reason is that you’ll be entering into the dangerous game of trying to time the markets, which rarely ends well. Even in a recession, a buy-and-hold strategy is likely to work better for the majority of investors as long as it is diversified and the investment timeframe remains reasonable. Bailing now means selling low as well as missing that critical bounceback which takes us back to the initial high before this peak to bottom plunge began.
Our MD Trevor Keidan explains this reasoning in more detail in this post.
But I guess it’s wise to hold off investing in the current investment landscape?
We’ll leave this one to the aforementioned Howard Marks as we’re unlikely to be able to put it better:
‘So it’s my view that waiting for the bottom is folly. What, then, should be the investor’s criteria? The answer’s simple: if something’s cheap — based on the relationship between price and intrinsic value — you should buy, and if it cheapens further, you should buy more.’
And here’s the good news!
A picture speaks a thousand words so here is what happened to the S&P500 in the ten years following its financial crisis low in 2009:
While the outlook for investors right now is far from ideal, the key takeaway here is be patient. Just as night follows day, a rally will follow this decline. Keep your eye on the long game and keep the faith!
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