We are not generally in the habit of posting ad hoc updates; we encourage clients to play the long game but every now and then we decide to send out a note in response to extraordinary events. This is one of those notes.
On Wednesday 19 February the US stockmarket hit an all time high. The following week the US market fell by 10%. This has only happened on four other occasions since the Second World War, three of which have occurred this century. The doom-mongers will make much of this.
The primary cause of the current panic is of course the unknown consequences of coronavirus. No sensible commentator will make detailed predictions about the effects of this virus. The effect on supply chains, the effect on demand, the effect on confidence and so on are all almost impossible to quantify. ( As a side note, policy reactions might be a little easier to predict – expect even lower interest rates and increased government spending, though how this helps my local shops waiting for goods to sell is not clear ). Satis and Hillier Hopkins have advised clients through all of the four major declines and I was advising during the original Black Monday in 1987.
On each occasion, markets eventually recovered. Sometimes they bounced back and sometimes it took years, but markets and capitalism are in the long term resilient. On this occasion we have not just Covid 19 but the most extraordinary decline in oil prices. This looks serious. There will be more human casualties and there will be business casualties. However history suggests that markets often overreact; in 2020 more trading is controlled by algorithms than ever before. What worked in the past may not always work the way one expects in the future. However what worked in the past was either to sit tight and take no action, or to buy more stocks. Most of the stocks that you ( and I ) owned in February are 10% to 20% cheaper in March. Unless there is a need for cashflow, selling equities now seems a perverse reaction.
In the modern era, we have far greater access to world news at just the click of a button, or from flash news alerts on our phones. This is not always a good thing as newspapers and websites publish news stories that will attract readers. It can be all too easy to focus on these stories and get gloomy, disheartened or uncomfortable about the reported danger to life, society or wealth of these threats, the latest being the coronavirus.
However, these world and health events have happened throughout history. Over the past 20 years alone, there have been many material events that we may have felt uneasy about at the time. During such times – at least from a market perspective – it can help to look at the past to ease our concerns. In the past and this may not, of course, repeat itself markets have been remarkably resilient.
It is important to remember that in an efficient market current world events and investors’ views are already factored into share prices. As hard as it can be, we need to remember to keep our emotions in check, believe in the robustness of our portfolios and continue on our investment journey with a long-term view. Future news may make the outlook brighter or gloomier. No-one knows.
From a personal perspective these things are worrying, but we live day to day with many higher risks such as driving to work or catching the flu, which infects 1 billion people worldwide every year.
‘This too shall pass’ as the legendary investor John Bogle used to say.
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