The global COVID-19 outbreak has sent global stock markets into chaos. With massive drops followed by huge rebounds day after day, volatility has become an ever-present force that investors have to manage. Anyone who follows the news knows that the world’s economies are going through a prolonged spell of volatility. It’s natural at these times for some investors to have concerns. Now, more than ever, it is imperative that investors avoid making decisions motivated by fear. The importance of staying invested cannot be overstated, even as markets continue to plunge.
Staying the course
Wise investors know that investing is a long-term commitment. Historically, investors who have been able and willing to ride out the periods of decline in the markets have seen their investments recover. Investing with a long-term outlook and with long-term goals is the best way to reduce the impact of stock market fluctuations and see out periods of volatility. The chart below shows that short-term volatility is a characteristic of investing, but over the long term the trend is a rising one.
Plotting the course
While we recognize that clients are trying to comprehend the impact of these events and asking where to turn, it’s well worth remembering the famous quote from the legendary investor Warren Buffet: “Be fearful when others are greedy and greedy when others are fearful.”
The duration and severity of the downturn will depend on how quickly authorities can contain the outbreak and, ultimately, how effective the current ‘lockdowns’ prove to be.
This means we’re effectively in ‘phase 2’ of what we think will be a four-stage process of decline and recovery (see opposite). It’s important to remember that the emergency central bank intervention we’ve seen so far is likely to be ineffective in terms of halting the spread of the virus or its impact on markets. It’s aimed at helping struggling companies and consumers to keep their heads above water.
Historic stock market reactions to outbreaks
One way to look at the Covid-19 outbreak is in the context of previous pandemics and the damage they brought to markets. Below is a table created by strategists at JPMorgan which looks at the stock market reaction to outbreaks such as SARS in 2003 and swine flu in 2009.
JPMorgan concludes that these episodes didn’t lead to extended periods of equity selling and, in fact, became buying opportunities within weeks, with local indices rising 23% on average in the three months after the global peak in the health scare.
If you have any questions on the above or about your personal portfolio, please contact your wealth manager. We are here to help support you in these challenging times.
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