Posted: 27 / 04 / 2020
As the Coronavirus pandemic has continued to sweep across the planet at a breath-taking rate, it has dominated the news, taking up countless hours of airtime and significant space in the press.
Although very much a secondary issue to the devastating loss of life, the pandemic’s effect on the global economy and stock markets has also had substantial media coverage and is undoubtedly causing investors concern, both in terms of the losses suffered to date, and what the future holds.
It is certainly the case that stock markets globally, without exception, have endured some of their worst performances since the days of the 2008 financial crisis and Black Monday & Tuesday in 1987.
For example, the UK market, as measured by the FTSE 100 Index, fell 10.9% in one day on 12th March 2020, its worst trading day since 1987. This followed a fall of 7.7% only a few days earlier.
In context, the following table illustrates the 10 worst days experienced by the FTSE 100:
|1||20th October 1987||-12.20%|
|2||12th March 2020||-10.90%|
|3||19th October 1987||-10.80%|
|4||10th October 2008||-8.80%|
|5||6th October 2008||-7.90%|
|6||9th March 2020||-7.70%|
|7||15th October 2008||-7.20%|
|8||26th October 1987||-6.20%|
|9||11th September 2001||-5.70%|
|10||6th November 2008||-5.70%|
Though markets have recovered from the lows hit during March, they are still some way off where they stood at the start of this year, with the FTSE 100 still down just over 23%, as the following shows:
Data source: Financial Express Analytics
Given the magnitude and speed with which markets have fallen in the course of only a few weeks, it is easy to understand why investors might be nervous about what lies ahead and whether there are greater or fewer investment opportunities, or indeed further threats, in light of this.
Where from here?
It is, quite simply, impossible to predict what may happen next, with regard to any aspect of this virus and its wider ramifications. The severity of the disease and its long-term economic impacts remain to be seen.
The stock market, since it is driven in large part by sentiment (which is currently very negative) and the perceived outlook of the future earnings of the constituent companies that form the indices (also negative), has been quick to react, pricing in a very bleak near-term horizon. However, history shows that markets do have a tendency to bounce back strongly over time, often precipitating any actual improvement in economic and company-specific fortunes.
To illustrate this, the following table shows how, over the more recent past of the latest two decades, the largest single-day falls in the FTSE 100 have been followed by strong growth over the immediately subsequent period:
|Rank||Date||One Day Fall||Return after 1 year||Return after 5 years|
|1||20th October 1987||-12.20%|
|2||12th March 2020||-10.90%||?||?|
|2||10th October 2008||-8.80%||37.20%||98.98%|
|3||6th October 2008||-7.90%||17.23%||69.58%|
|4||9th March 2020||-7.70%||?||?|
|5||15th October 2008||-7.20%||33.96%||93.55%|
|6||11th September 2001||-5.70%||-8.70%||45.20%|
|7||6th November 2008||-5.70%||25.96%||90.34%|
The strongest five-year rebound following some of the largest one-day falls brought a return of just under 99%, this being equivalent to an annualised return of 14.75% in the five years following the 8.8% fall for the FTSE 100 on 10th October 2008.
This date fell right in the heart of the 2008 global financial crisis and, given the abject mood at the time, an investor may have struggled to believe that an investment made that day would almost double in value within five years (before charges).
Of course, past performance is not a guarantee of future performance, and these returns do not include any costs or fees, but this does underline the historic resilience of stock markets over the long-term, even following significant shocks.
Importance of time in the market
As the chart below clearly illustrates (again using the FTSE 100 as a measure), investing in stocks and shares has provided solid returns over the long term, despite the inevitable ups and downs that have occurred over the last three decades.
On the basis of the above, a £10,000 investment in the FTSE 100 at the end of 1990, left alone, could now be worth around £60,900 (not adjusted for charges or inflation), which even takes into account the latest market turbulence.
Whether today is a good day to invest or not is something we will only know tomorrow. What is evident though, is that having the ability, patience and nerve to ride out periods of instability and volatility has historically proven fruitful for investors seeking to take advantage of the corresponding opportunities created as a result, whether this be through holding onto investments already in place, restructuring existing investment portfolios or investing new monies.
Having just entered the new tax year, there is scope to make use of all 2020/21 tax allowances too, thereby gaining even greater benefit from investing at this time. For example, the ISA allowance (£20,000), pension annual allowance (up to £40,000) and Junior ISA allowance (£9,000) are all readily available to most investors.