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Market briefing – 20th April 2020

Boosted by a combination of government financial relief packages and the possibility that we may be passing the peak of the coronavirus pandemic in Europe, the markets have begun to recover since the market lows on 23rd March, regaining some of the earlier losses. Could this be a bear market rally and how could it affect long-term investments?

Bear market rally (1)

As the graph below shows …

Source: FE Analytics (2)

… the US is in the middle of a rally (i.e. a bear market rally is a sharp, short-term increase in share prices amid a longer-term bear market) as both the Dow Jones Industrial Average(3) and S&P 500(4) have recovered well since the market lows on 23rd March, regaining most of the earlier losses.

The FTSE 100 in comparison …

Source: FE Analytics (2)

… has recovered over 15% from its lowest point.

The US government has been active in putting together relief packages to support businesses. The US Congress has released $2 trillion to help individuals and businesses directly affected by the virus(5) and more recently, the US Federal Reserve has created a $2.3 trillion bundle of loans and liquidity support to help markets and businesses through these difficult times(6).

Most investors will be expecting bad news for the first quarter earnings season, which will likely be ignored by the markets. However, one development that seems to be supporting the markets now are signs that the epidemic is being suppressed. Perhaps we are passing the worst in Europe while the US appears to be approaching the peak of this outbreak. Globally, populations remain vulnerable to another outbreak of the virus and this is something that the authorities will continue to monitor very closely, resulting in the prospect of several months of rigorous controls over population movement. It appears that life won’t be returning to ‘normal’ for some time.

It seems that the stimulus for markets to have a more sustained rally from current levels is positive news on the development of solutions to help those people infected to fully recover or, more importantly, a reliable vaccine, but that is probably many months away. As mentioned above, while markets have risen both significantly and rapidly, it’s possible that this is a bear market rally, i.e. a bear market rally refers to a sharp, short-term price increase in a stock or market amid a longer-term bear market period. Crucially, should this be the case, markets would fall minimising some of the recent gains.

Long-term investing

Whilst it is impossible to predict when the markets have bottomed or when the prime investment point of entry is, it is clear that markets are considerably cheaper than they were 3 months ago. The question now being asked is whether now is a good time to invest? Below is some data that supports some benefits of investing now. However, caution should be used; you know the phrase ‘past performance is no guide of future returns’ – and that’s in ordinary market conditions. This pandemic is nothing that markets have seen before in the modern era.

Given the falls that occurred between the end of February and the first three weeks of March, many investors may think it’s best to take their money out of the market and ‘invest’ in cash. Caution should be used here too; the emergency cut in interest rates by the Bank of England (to 0.1%) means to earn £1 in interest before tax, you’d need to save £1,000! This may seem a safer option in the short term, but you will get very, very little return. Indeed, in real inflation adjusted terms it is a guaranteed loss of purchasing power. And nothing in the last decade, and certainly in the last month, suggests that interest rates will increase to anything more meaningful. Persisting with non-cash investments over the long term may be a better option.

The chart below highlights the five quarters in the US S&P 500 since 2008 where the quarter loss has been in excess of 10%; it includes Quarter 1 (Q1) 2020 which we have just experienced (highlighted in red).

Source: Financial Express (2)

As can be seen in all three green highlights, the quarter immediately following a 10% or more loss bounced back well from the previous quarter’s loss; virtually regaining most of the losses suffered.

Even the amber highlighted period in 2008/09 – where Q1 2009 lost more than 10% – saw a minor recovery in Q2 (the quarter immediately following), with Q3 seeing the largest growth in a quarter for this entire period (Q4 2008 to Q1 2020).

A similar story can be seen from reviewing the UK’s FTSE 100 over the same time period.

Source: Financial Express (2)

Four quarters since 2008 have seen losses of more than 10% including Q1 2020, highlighted in red. In the previous three quarters, highlighted in green and orange, all have seen a significant bounce back in the quarter immediately following. As shown within the orange, and as was the case with the Dow Jones and S&P 500, Q2 2009 (the quarter immediately following Q1 2009) saw a minor recovery, with Q3 seeing the largest growth in a quarter for this entire period.

Overall, both US and UK investment history would suggest that if you are able to invest, then you could make money over the long term; and now might be a good time to invest. However, several unknowns mean that markets may fall further before they bounce back, and consideration should be given to your personal circumstances.

Importantly, caution should be applied. We must remember, ‘past performance is no guarantee of future returns’. At this point in time, we do not know when we will get back to normal, and we do not know what impact longer-term isolation will have on us all, including investment markets.

Continue to keep calm

It is true that the short-term horizon is extremely uncertain due to the unpredictability of this situation. However, it is important to remember that we very often have a long-term investment time horizon.

We will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.

Sources and references

(1) Square Mile Investment Services Limited
(2) Financial Express
(3) The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned blue chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ – Investopedia.
(4) The Standard & Poor’s (S&P) 500 Index is a market-capitalisation-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities – Investopedia.
(5) Bloomberg (https://www.bloomberg.com/news/articles/2020-03-25/what-s-in-congress-2-trillion-coronavirus-stimulus-package)
(6) ABC News (https://abcnews.go.com/Business/wireStory/fed-announces-23-trillion-additional-lending-70062577)

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