A long-term view
In the midst of a global pandemic, investing in the stock market may seem at the very least, counterintuitive. Yet, as deep as we are in the economic fallout caused by COVID-19, a quick look through the history books reveals the wisdom in adopting a long-term investment strategy, especially during these turbulent times.
If the past few months are viewed in isolation, the picture they paint is far from encouraging. In the UK, nearly a quarter of workers have been furloughed. In the US, the unemployment rate has risen to levels not seen since the Great Depression. To compensate those affected by the lockdown, governments have borrowed billions, the repayment of which will curtail economic recovery for years to come and drastically affect the future distribution of wealth.
Against this backdrop, markets around the world have been hit hard, ending a record-breaking period of economic growth that had lasted over a decade. The UK’s FTSE 1oo index (made up of the 100 largest companies listed on the London Stock Exchange) lost more than eight years’ worth of gains from February to March. In the US, the S&P 500 index (the equivalent index in the US) dropped 34% over a similar timeframe.
The blow to the markets has been two-pronged. Firstly, a reduced workforce around the globe resulted in people naturally having less cash to spend, reconsidering ‘non-essential’ purchases, and thereby reducing the amount of money circulating in the economy. This uncertainty about employment and combined with the fact our spending options have been drastically limited – with everything from pubs to coffee shops to hairdressers being forced to temporarily close – has meant on the whole, we simply aren’t spending as much. This has affected companies’ revenues, which in turn makes investors question whether they want to remain invested in these businesses or to put it another way, if the grass is greener elsewhere. This lack of investor confidence and subsequent waves of shareholders selling their stakes in these businesses, leads to falling prices.
However, major stock markets all around the world have since rallied from their mid-crisis low points. The S&P 500 enjoyed the largest 50-day rally (a defined period of growth from a noted low-point) in the index’s history to June 3rd, bouncing back 40% from its March 23rd low. Meanwhile, at the end of April, the FTSE 100 was up 20%. While stock market rallies might seem somewhat bizarre during economic crises, they occur frequently throughout the 20th and 21st centuries. The driving forces behind them being a combination of political interventions, changes to government spending or taxes (fiscal policy), and lastly, increased investor confidence. Or in other words people starting to feel better about what they’re seeing and investing again. If we look at the S&P 500’s other largest 50-day rallies, it shows us that on average, stocks prices were higher 100% of the time both six and 12 months after the 50-day rally point: the average 6-month return was over 10%, with one-year returns over 17%. It’s easy to get bogged down in the numbers, but simply put, precedent here predicts continued growth and makes a strong case for remaining invested.
A look at other major economic downturns throughout modern history backs up this optimistic outlook. Perhaps the most relevant analogy to today’s COVID-19 pandemic is that of the 1918-1921 Spanish Flu. At its height in the UK, GDP (a measure of the market value of all the final goods and services produced in a specific time period) fell by 12.3% in a single quarter. This stark downturn wasn’t followed by further losses in GDP; but instead by an increase of 13.7% in the following quarter, which contributed to the return to pre-crisis levels in 1924.
Another tempting analogy is the Great Recession of 2007-2009, which devastated the housing boom-fuelled bull market (a market in which stocks rise 20% above their most recent low point). While it’s important to recognise the differences between the contributing factors to the Great Recession and the COVID-19 downturn, the relatively swift stock market recovery from its crisis low should provide further scope for optimism. In the US, real GDP regained its pre-recession peak in 2011, three and a half years after the onset of the downturn. Meanwhile, the Dow Jones industrial Average index (DJIA)–which during the recession lost over half its pre-crisis value–passed its 2007 high just four years after the recession ended.
Since the end of the Great Depression, the US’s S&P 500 index has enjoyed 13 historic bull markets, which, together, have lasted over 65 years. While downturns have punctuated these periods of growth, the trend remains a constant: at the onset of economic stagnation or recession, several new factors have come into play, stimulating recovery and subsequent growth.
Though economists looking at the COVID-19 pandemic disagree on what the economic recovery might ‘look’ like, they all acknowledge that market recovery will occur. And while investing in the midst of a pandemic is daunting, especially given the uncertainty surrounding a possible vaccine or the breakout of a second wave, if history can teach us anything, it is investing for the long-term, and most importantly remaining invested, will put you in a strong position to benefit from the likely recovery and subsequent boom of the post-COVID-19 market.
Please note this article is for information purposes only and is not personal advice. As is the nature of investing, your capital is at risk.