May 1, 2020 | BEN WAITE

Corona Crash – what next for stock markets?

Published: 1st May 2020

 

As we reach the end of another week in lockdown, the world seems as uncertain as ever. Six weeks ago, we were asking:

 How far and how fast will Covid 19 spread?

 How long will the lockdown last?

 What will be the cost – human and economic?

Some answers are starting to appear, some remain unknown and of course new questions are replacing the old ones:

 What’s the lockdown exit strategy?

 How will we return to some sort of normality?

Back in March we looked at current market falls in the context of history. As speculation increases around what will happen next, we can once again look at historical evidence for help.

Is it common for market falls to be followed by a recovery?

Markets hate uncertainty but dramatic falls during March have been followed by improvements in April, particularly in the US as we highlighted in our recent blog. Whilst recent volatility has been worrying, a big fall followed by a recovery isn’t uncommon.

To prove that point let’s look at the US S&P 500 – comparing the 2008 financial crisis with the current situation:

Source: John Authers Bloomberg April 2020

 

The two are following pretty similar paths so far. Add in some further evidence from the 1929 and 1987 stock market crashes and there are more similarities, as shown in the graph below.

This graph looks at the S&P 500 to the beginning of April and so doesn’t take into account the further 200 point increase at the time of writing this blog.

Source: Longview Economics, Macrobond

 

So, what will a recession look like?

As we’ve said before, we don’t have a crystal ball and no one can guarantee that history will repeat itself. This hasn’t stopped market commentators and economists from speculating over the length and severity of a global recession, and what might come next for global stock markets. There are three main possibilities doing the rounds:

V: The consensus seems to be that we will experience a V shaped recession – a sharp slowdown in the second quarter of 2020, followed by a sharp recovery during the second half of the year.

U: Some economists are saying the recovery will be longer, taking us into 2021, giving us more of a U shape path or even a Nike Swoosh!

W: Over the last week or so, there’s also been talk of a double dip recession – a W shape, where a recovery starts but Covid 19 spreads again sparking another downturn before an eventual economic recovery takes hold as the virus is finally defeated.

What do we think at CW?

If you read our content you’ll know we aren’t huge fans of speculation! So, it’s important to remember the following points if you can’t escape the media noise:

 The last time we ‘apparently’ experienced a double dip recession was in the aftermath of the 2008 Global Financial Crisis when economists were certain the UK was destined for another dip towards the end of 2011 and into 2012. However, those numbers were estimates and by mid-2013, the Office for National Statistics admitted there hadn’t been a double dip at all. Hindsight is 20/20, whereas forecasting is more smoke and mirrors.

 Secondly, recessions don’t necessarily equal negative returns for investors. For example, history shows us that across the two years that follow a recession’s onset, equities have performed positively. The graph below looks at the US stock market returns covering the past century’s 15 US recessions. It shows that investors tended to be rewarded for sticking with their equity portfolios – 73% of the time the returns on equities were positive two years after a recession began.

Source: Dimensional Fund Advisers

 

What should I believe?

The press will continue to speculate about what comes next and we understand this can be worrying, but it’s important to remember that history is fact and headlines are hearsay. As we’ve mentioned previously, a well-structured, globally diversified portfolio will see you through this current turbulence.

Keeping calm and controlling your emotions is key – if you’re struggling to do that or have any questions get in touch.

 

Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.

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