This time last year, financial markets around the globe were experiencing one of the swiftest bear markets in history. Stock markets were in full panic mode as the global economy ground to a halt and governments raced to control the spread of COVID-19.
Mainstream media added fuel to the fire with attention grabbing headlines ensuring that no investor could hide from the sense of panic. Below are just a few examples from the Financial Times:
“Virus triggers worst run on markets since financial crisis”
“Investors nurse big losses as virus fuels worst week since 2008 crisis”
“Traumatic day on global markets spurs central banks to step up action”
“Oil price plunge sends tremors through battered global markets”
“Global economy set for sharpest reversal since Great Depression”
There is no denying that this was a difficult period for investors with the usual signs of widespread panic clearly visible. At the worst point, the US stock market was in a 30% decline while the UK market was hit even harder, falling 35% over a matter of weeks.
Though periods such as these are difficult to endure, even for the most seasoned of investors, as we have said in the past, these extreme fluctuations are the price we occasionally must pay in order to earn higher long-term returns.
The COVID-19 pandemic was an unpredictable exogenous shock whose occurrence, let alone impact, was almost impossible to predict.
The impact of market crashes caused by such events can be mitigated by ensuring your portfolio has some exposure towards diversifiers and risk-off assets. However, to be effective, this action must be proactive rather than reactive and be implemented ahead of time instead of during the event.
There is little value to reacting in the moment to protect one’s portfolio after most of the damage has already been done.
The real key to success is remaining focused on our objectives and the actual time horizon over which we are investing. Unfortunately, it is exactly at these times that most investors capitulate or start making short-term decisions with their long-term investments. This action essentially leads to crystallising losses and missing out on the recovery when it comes.
In one of our previous articles titled “Can we outrun this grizzly bear” published in May 2020, we outlined several reasons why we expected the bear market to be relatively short lived and for markets to bounce back strongly.
In this article we also investigated the relationship between the speed of previous bear markets and their subsequent recoveries, finishing by saying “Ultimately, we are confident that the global economy and the businesses that operate within it will have the legs to outrun this grizzly bear!”
Since we published this article, nearly all major equity markets are up between 20-30%, with some even reaching new all-time highs.
Below is an updated version of the chart used in our original article clearly showing the swift fall and then recovery experience during 2020 (dark blue line).
This is not to say that we can predict the future, but instead to demonstrate the importance of remaining consistent in our approach.
Though the path forward is always unknown and is likely to be volatile as the world re-emerges from the Coronavirus crisis, we are confident that our robust investment process will continue to ensure clients are positioned well for the future and most importantly in line with their objectives.
General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.