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Every stock market crisis is unhappy in its own way

23rd March, 2020

Printed in the Sunday Times on March 22nd
Tolstoy’s “Anna Karenina” principle—“All happy families are alike; every unhappy family is unhappy in its own way”—seems on the surface at least, the right way to think about the current Coronavirus related stock market sell-off.

Bull markets seem to have many common attributes; they thrive when everything's calm, Central Banks’ are on board, earnings are good and money is flowing. Each bear market however seems to be ‘unhappy’ in its own way.

Stock market crises come in a variety of forms. When the investing seas are calm and skies are blue, we imagine that when the next sell-off arrives we will have the fortitude to withstand the selling pressure or even buy the dip. But when that crisis arrives – it always ‘seems different this time’. Never more so than today.

The Coronavirus crisis

I can’t recall a 3-week period like this. The pace of the sell-off is ferocious. The US stock market is off 27% (a technical bear market) since the peak on February 19th to 12th March. I’ve read dozens of recent commentaries with the common refrain, fear not, this too shall pass. No doubt it will, but it provides little solace in the heat of the moment.

This crisis is unique ‘in its own way’, and there are many imponderables, but there are certain things we do know about stock markets – which in times like this, serves us well to remember.

Bear markets that are associated with recessions, of which most are, have lasted on average eighteen months with a peak to trough loss of 40% (according to JP Morgan Guide to the Markets, 2Q 2019, data refers to US equities). Bear markets that occur in the absence of a recession decline by closer to 30%, which is not far off where we stand today. We should keep in mind that we don’t have a lot of data points here to draw from, as these periods of chronic stock market weakness are rare (according to JP Morgan there have only been 10 bear markets, not including this one, since 1929).

Whether or not the global economy will experience a recession because of the Coronavirus related upheaval is difficult to say. It depends on how long the disruption lasts.  A global pandemic is unprecedented in the modern era. So yes, there are many imponderables.

What do we know about stock markets?

But there are many useful historical periods that we can cross reference. The stock market declines every year, in fact on average just over 15% every year. Every seven or eight years the market declines by twice that. If  measuring calendar year returns since 1929, rather than just bear market periods, the market declined by c.30% in 13 of the last 90 years. All of these declines were unique in terms of the circumstances. But one thing that binds all of them; they were temporary. Yes, we can go through very fallow periods of returns (like 10 years ending 2009). But these are exceptionally rare.

The greatest risk to anyone investing in the last century was not whether they were in the market during these tough declines. Their greatest risk in my opinion was whether they were out of the market for the much more frequent advances.

The stock market experiences significant short-term volatility, but the great mistake is to conflate this with long-term risk. Buying when the market is down 30-40% feels risky. But for long-term investors, bear markets have always presented a buying opportunity.

Hindsight will allow us to one day judge this as brave or foolish

The markets short term stumbles, lurches and nose dives, like pro-14 wins for rugby teams that aren’t from Leinster, are outside the sphere of what is divinable. The dirty secret of investing is that the future is always unclear.

US equities have generated positive returns 79% of the time over 1-year periods since WWII. 2020 will likely be one of the 21% negative years, but a move out of the market when markets generally move up over time, is a low-odds undertaking. It’s not a game you should attempt to play.

Savings accumulated over a lifetime is something precious and irreplaceable. In seeking to deploy it one must acquire a sense of detachment from the noise of the dancehall.

Hindsight will one day allow us to judge whether phasing money into the stock market today over the next twelve months is brave or foolish.

In financial markets, by the time it feels like the coast is clear and putting money into riskier investments is safe, the real money has already been made.

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