Currently, most of the world markets are in a bear market with more than a 20% drop from their highs. With the active measurements happening all over the world to diffuse the situation, such as quarantining whole cities, or even, countries such as Italy, it is now expected that this may result in a worldwide recession. While not official yet, the stock markets are showing that to be the case.
We mentioned that this systemic risk is un-diversifiable, as well as, its effects and length are unknown over the short-term. However, if we believe that we will overcome this recent crisis and our current fear, the long-term prospects should look even more attractive from a valuation point of view. For our long-term goals, we believe that not only should we not sell, but also, we may need to prepare and invest more during these times. See below for the declines and recoveries after downturns in the past bear markets.
While each crisis is unique, from what we know from other recessionary times, we can make decent estimates on what to expect during this one. During the past 100 years, we’ve seen many bear markets that have happened for different reasons. As the market drops further, the first emotional response typically is to reduce the ‘pain’ by getting out of that situation. It is at this point where many people, now scared, decide to sell and get out. But we do know, as seen above, that an emotional action like that is typically wrong. People that have sold have missed out on the major recoveries that have followed. Let us repeat. “People that have sold have missed out on the major recoveries that have followed.” And, if you say, “I’ll know when to get back in” that’s another myth. It is very hard to know when to get back in as the market bottoms are formed during the worst of times. We remember March of 2009, when people were predicting that all financial companies would go bankrupt and the whole economy would go into a depression and in hindsight, it was that moment when the market bottomed.
Lastly, as this is now a Global Pandemic, we shouldn’t underestimate the responses of world governments. Many, including the EU, the US and others, have already made announcements easing the burden on the small businesses and others. But more will probably come on the fiscal side as well as from the Central Banks side. Quantitative Easing (QE) programs that were put on hold as the economy recovered from the last recession will probably restart and provide support to banks and eventually to the global stock markets. More than anything, however, we hope that strong measures are taken by all governments (just like in Asia and Italy) to prevent the further spreading of the virus and stopping the exponential growth, which threatens the overall health system. If this is contained and the spreading is slowed down, we could possibly see a faster recovery than expected.
Lead Advisor, InvestEd.