I appreciate these are worrying times. Yet, it’s important to keep level-headed when faced with a financial crisis. In such situations, it’s often useful to look back, when trying to make sense of the future. Markets do, and will, recover. In the meantime, here are my thoughts about recent events and three practical suggestions for investors.
How to respond to the worst market fall since 1987
When the market cracks in the way that it did on Thursday 12 March 2020 (you will remember this date), everyone’s pain is different – and the same.
I spoke to two very different investors. A young family member was anxious about whether her flat-buying hopes had gone up in smoke. For her, the loss of a few thousand pounds in less than a month seemed catastrophic.
I also spoke to the manager of one of the Select 50’s (our expert’s favourite funds) most popular funds. In one day, he told me, the fund’s losses had exceeded £100m. He looked ashen but he said he expected to look back on this day as one of the great buying opportunities of his career.
Some will have spent time wondering whether their retirement plans needed to be postponed. Others will have been calculating whether they could sustain their current level of income drawdown in a retirement that has already begun.
Don’t dwell on the ‘what ifs’
For many investors, 12 March will have been a day of pointless ‘if onlys’. Why didn’t I see this coming? Wasn’t it obvious, the market was riding for a fall?
After a fall in the stock market that was only exceeded in the fabled crashes of 1929 and 1987, this is understandable but fruitless speculation. Two months ago, many of us believed that the most important drivers of the market were the Federal Reserve’s three interest rate cuts last summer and the easing in trade tensions between China and the US. That seems like ancient history now.
But hindsight is a wonderful thing. The fact is that the coronavirus and Saudi Arabia’s suicidal oil price war are genuine ‘black swan’ events. Wholly unpredictable and devastating in their impact.
They say that stock markets ride the escalator higher but come down in the lift. A glance at any chart of the FTSE 100 illustrates this only too graphically. The sell-off on 12 March did not reflect a rational assessment of the increased likelihood of global recession – it was a futile attempt to make the pain go away. Capitulation.
Biggest one day gains for the FTSE 100.
Let’s answer some questions you might have
Is a recession more likely because of the coronavirus and the measures to counter the disease? Yes, it is. The only question about the downturn is how long it will last and how deep it will be. But this downturn is different from the post-crisis recession. Supply and demand have been hit but neither has been permanently destroyed. The economy will bounce back, perhaps quickly.
Has the sell-off created buying opportunities, as my fund manager suggested to me? Undoubtedly. In the hardest hit sectors, such as travel, leisure and retail, the question is not whether shares are too cheap or not. In many cases they are, with one significant caveat. If companies survive, they will recover strongly and rapidly. The decision whether to buy or not is binary.
Is this the end of the post-crisis bull market? Technically yes, because the fall of more than 20% since the most recent high (July 2018 in the case of the FTSE 100) draws a line under that long rally. More importantly, I think this is a watershed for markets because for the first time since 2009 investors have failed to respond to monetary stimulus. The next phase of market growth will not be fuelled by central banks but must be find a new source of energy – fiscal stimulus leading to genuine economic growth.
What should investors do now?
I suggest three things you should consider:
- Do nothing. The temptation to liquidate your investments is only natural but I believe that in the long-run it may be a cause of regret. Selling after a fall makes the pain go away but it simply crystallises a loss. Remember, unless you abandon the stock market completely, you will have to buy back in at some point. If you wait until you feel better about investing, that moment will be way too late to benefit from the recovery that will come in due course.
- Keep investing through the cycle. You don’t have to be a hero, throwing all your spare cash into the market in an attempt to catch the bottom. In fact, you shouldn’t. It is very likely that this is not the trough. But if you continue to drip money into the market, this does not matter. You will be building positions at depressed levels which in the long run will serve you well.
- Don’t miss out on this year’s ISA and Sipp allowances. The 5th of April is a hard cut off. The generous tax advantages are ‘use it or lose it’. You don’t have to put money to work immediately (and if you follow the previous suggestion you won’t), but you do need to add cash to your account before the end of the tax year.
Looking back the 1987 crash looks like a fairly innocuous bump in the road today. In time, the coronavirus crash may look the same.
Further reading: Investment themes for volatility to manage the risks