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The World In A Week 52 – Deciphering The Known Unknowns

Memories of what it was like during the turmoil of the global financial crisis have resurfaced, but even in the height of the tumultuous times of 2008 and 2009, the market did not have such extreme one-day movements as we have just experienced.

Last week we had two of the worst days in history of the FTSE 100 and the fall on Thursday was bigger than anything experienced during the throes of the great recession:

20th October 1987-12.2%
12th March 2020-10.9%
19th October 1987-10.8%
10th October 2008-8.8%
6th October 2008-7.9%
9th March 2020-7.7%
15th October 2008-7.2%
26th October 1987-6.2%

Source: Investment Week, SharePad/AJ Bell

In the wake of the FTSE 100’s second worst day in history, the index is continuing to fall, down over 6% at the time of writing and puncturing the 5,000-price barrier, as airlines and holiday firms feel the impact of travel bans and falling demand for flights.  The accumulated combination of falls has meant the FTSE 100 is more than 30% below its 52-week high and well into what is traditionally called bear market territory.

The fear of recessionary risks that dominated the end of 2018 have returned, and the record breaking 11-year bull market in the US has ended with the S&P 500 dropping as much as 26.7% from its peak in February.  The most obvious question investors are asking themselves is whether we are at the bottom.

Putting last week’s market moves into context is critical.  By comparing against the three previous market corrections, namely 1987, 2000 and 2008, we can gain some perspective during these agitated times.  Using the historical data of the S&P 500, the main index of US stocks, you can see that while the drops are dramatic, the subsequent recoveries do provide a remedy for the long-term investor.

S&P 500DropDurationRallyDuration
1987-34%3 months582%147 months
2000-49%30 months101%60 months
2008-57%17 months378%129 months

Source: Bloomberg, Standard & Poor’s, J.P. Morgan Asset Management

While we expect continued disruption to economic activity, we do believe a path towards recovery does exist.  Policy makers and markets will continue to act swiftly and decisively to the continually changing situation.  The unpleasant truth is no one truly knows what will happen and that uncertainty is exacerbating the reactions in stock markets.  However, the landscape has changed dramatically since the global financial crisis and previously unthought of solutions are now possible.

In order to avoid a repeat of the great recession, governments need to allow for unlimited fiscal compensation for lost revenues and wages to all businesses and employees affected by quarantines and lockdowns.  Monetary policy is necessary to avoid financial systems collapsing, while fiscal measures, that are designed to support the recovery, should only be deployed once the virus is under control.  We had our first budget from Rishi Sunak promising a record-breaking stimulus package of £30 billion to counteract the effects of the Coronavirus. Fiscal expansion is already being pushed by the Government, looking to invest in the UK economy, particularly infrastructure projects.

Central banks around the globe have acted swiftly and continue to react to an unknown environment.  This morning we have seen the Federal Reserve’s Open Market Committee reduce interest rates to zero, as they realise the effects of the Coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.

The Federal Reserve expects to maintain interest rates at zero until it is confident that the economy has weathered recent events and is back on track.  What is more interesting was the Committee’s comment that as it continues to monitor the developments and implications around the globe: “…will use its tools and act as appropriate to support the economy.”  This will include significant quantitative easing and increasing its own balance sheet once again.

Liquidity is being pumped into the financial system to ensure any signs of strain are bolstered and more targeted support is already primed.  This would appear to be Jerome Powell’s ‘Mario Draghi’ moment, as the actions of the central bank are saying they will do whatever it takes to support markets during this unprecedented time.

The Fed’s cut was part of a co-ordinated response from the world’s central banks, with the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank all introducing measures to shore up their financial positions.

While the trigger for the market collapse has been unpredictable, it is at least simple.  A market that had not seen a significant downturn in over 11 years, and was arguably over-priced on some measures, met the unknown effects of an alarming and virulent virus.  Whether the remedy will be simple is another of the myriad of known unknowns that we face; what we do know is that every market collapse has been followed by a recovery.

While we wait for the signs that we are close to the bottom, which means needing to see a little more clarity and certainty, such as infection rates slowing or evidence of global containment, we need to remember our long-term goals.   A pragmatic approach of long-term investing will enable investors to hold their nerve during the most turbulent of times.  Rest assured, cognisant of the current market volatility, the investment team continue to execute the processes that have been tested over the past 15 years, to ensure we deliver robust outcomes to all our long-term investors.