There are moments in horror movies when you might not only cover your eyes but also forget that it is only a film and you will soon be back in the real world. On occasions, investors can get the same feeling when watching stock markets.
We have experienced huge turbulence in global stock markets prompted by the coronavirus (COVID-19) pandemic and the spat between OPEC and Russia over oil production. This included a 10.87% fall in the FTSE 100 – what I call the 10 O’Clock News index - in just one day (12 March).
This is the fourth bear market of my career and while the catalysts are always different, there are clear similarities that we expect this time as well – although, like everyone else, I cannot say exactly when that will be.
So far, markets have treated the pandemic as a classic growth scare and reacted in typical bear fashion: the difference to previous declines has been the speed, with the slowest bull run in history quickly giving way to one of the rapidest bear markets.
Amid huge daily declines in stock markets, we have seen emergency policy responses from central banks in cutting interest rates to record lows and providing much-needed liquidity and lines of credit, with none of the moral hazard concerns that muddied the situation around banks in 2008. With many businesses threatened as countries enter lockdown periods, we would expect much more of this to come.
Looking to the next few weeks and months, there remains a huge amount of uncertainty and it is imperative we avoid the panic that has overtaken markets. Without being flippant, this is not the end of the world and things will recover – market particpants are currently attempting to bridge the gap between reality and perception when it comes to the ultimate impact on growth and that will lead to abundant debate over U versus V-shaped recoveries, and other letters beyond that.
It is always useful to put dramatic, short-term events into a long-term perspective: over Monday 19 October and Tuesday 20 October 1987, for example, the FTSE 100 fell 23% as Black Monday hit, but over the subsequent five years it produced a total return of 74.8%.
Bull markets ultimately last far longer than bear markets and these falls become mere blips on performance graphs the further back in history you go.
Another message to get across is that falling markets will always feel uncomfortable but a drawdown only becomes a loss when investors crystallise it by selling. Again, looking at history shows many of the worst days in markets are often followed by some of the best and selling out means missing these recoveries.
If you take the FTSE 100 stretching back to 1984, there have only been nine negative years out of 36, meaning positive 12-month periods are four times more likely. The average annual maximum drawdown over the period is 14% but in the majority of cases, the index ended that period in positive territory.
What previous bear markets have taught us is that staying calm is vital and getting caught up in the fear and greed-inspired push and pull of volatile markets can be dangerous. No one can control markets but we can control our own emotions – and when it comes to investment, this means falling back on a robust, consistent and repeatable investment process.
Equity markets have consistently proved the best way to generate real returns to exceed inflation but they rarely ascend in a straight line and we have to expect corrections on the path to long-term reward. Our focus remains on patient investing – the winning by not losing we talk about so often – and what this requires is the ability to look through short-term periods and keep faith in the long-term process.
Warren Buffett, as perhaps the world’s most famous investor, is finding himself quoted more often than ever in these troubled days and his claim that ‘the best new investment idea is often to buy more of what you already own’ is likely to prove particularly over the course of 2020.
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