Market briefing – 30th March 2020

Markets and events are continuing to move at an extraordinary pace.

Central banks are being very active in supporting the banking system to make sure funds start flowing. Central bank action is now having an effect and companies will start to see the financing they need to weather the worst of the storm. Governments are working to offset the impact of the economic shock caused by the collapse in demand for goods and services by ensuring people continue to have money in their pocket.

For example, the US is now fighting against the coronavirus pandemic with the Federal Reserve responding accordingly, unleashing an unprecedented $2trillion package to bail out the US economy. This action was well received by financial markets and saw the S&P 500 index climb significantly.

Initial, significant government intervention, combined with a recognition that continued fiscal (government spending) policy also has an essential part to play to protect workers, their jobs and businesses in the difficult few months ahead, is necessary. Nonetheless, moves like this are symptomatic of the continued uncertainty in stock markets and do not normally mark the bottom of bear markets.

And there’s the phrase – ‘bear market’. Is there anything useful we can glean from previous ones?

Keep things in context

Bear markets occur when prices in a market decline from their peak by more than 20%(1), often accompanied by negative investor sentiment and declining economic prospects. They come in all shapes and sizes, showing significant variation in depth and duration.

The current bear market began due to a number of factors, including shrinking corporate profits and possibly, the record bull market that preceded it. The immediate cause of this bear market was a combination of persistent worries about the effect of the Covid-19 pandemic on the world economy, and an unfortunate price war in oil markets between Saudi Arabia and Russia, sending oil prices plunging to levels not seen for nearly two decades.

The facts

Between 1926 and 2017, the US S&P 500 stock market had eight bear markets (1), ranging in length from six months to 2.8 years, and in severity, from an 83.4% drop in the S&P 500 to a decline of 21.8%(1).

An equivalent UK stock market – the FTSE All Share – has seen similar statistics. Focusing on the FTSE All Share, and using data supplied by Global Financial Data, Vanguard Asset Management has extracted the following conclusions for the period 1st January 1900 to 31st December 2018 (2).

Although it’s essential to remember that past performance is no guide to what happens in the future, the chart above does show that for the 118 years between 1900 and 2018, 87% of the time (i.e. 103 years out of the 118), the FTSE All Share was in a bull market, meaning that only 13% of the time was spent in a bear market. Also, the longest bear market since 1900 was the Great Depression in the late 1920s which lasted for 2.8 years, with the average length of time of a bear market being less than a fifth of the average length of a bull market.

How should you, as an investor, react?

As the graph above shows, albeit in the significant minority in terms of time spent, bear markets are a fact of investing. Also, as mentioned above, it’s very easy to forget in the middle of this current bear market that we have come out of a largely bullish decade. It’s also easy to think that what we’re experiencing now will last forever. As the bar chart shows, long-term investors experience many more years invested in a bull market than a bear one, seeing positive investment returns in the process.

As the last century or more has shown, market swings are normal, and as our chart shows, are relatively insignificant in terms of time spent over the long term. That said, seeing your portfolio on paper worth less than it was last week or last month, is emotionally difficult to cope with. However, it’s important to take guidance from the former Fidelity manager Peter Lynch, when he was quoted as saying it’s ‘time in the market, not timing the market’ (3); in other words, it’s important to remember that changing your portfolio in the short-term in the hope of avoiding loss rarely works.

Once the likely time frame for the duration of this outbreak has been established, markets will be able to act accordingly and with a degree of confidence. Trading remains volatile in both equity and bond markets, which is to be expected and may persist for some time. However, once there is some certainty that the worst of the impact of the virus has passed, markets will be poised to rebound.

Continue to keep calm

Going forward, markets are likely to remain volatile and broadly reflect the perceived and real economic costs and degree of uncertainty relating to the pandemic. 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 situation and keep you notified of any changes that are made. Please contact your Foster Denovo Partner if you wish to discuss your financial situation further.

Sources

(1) Investopedia, 2020
(2) Vanguard Asset Management based on Global Financial Data, 2020
(3) Peter Lynch, fund manager, Magellan Fund at Fidelity Investments between 1977 and 1990

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