• Stonewood AM

COVID-19: Looking into the rear-view mirror


It should not come as news to anyone reading this email that the world is currently fighting a pandemic that has had a material impact on the lives of everyone around the world. Most of you will be reading this while social distancing or self-isolating. Terms that we have all come to know well in the past three weeks. COVID-19 has had a sharp impact on asset prices across the globe as investors digest the news and implications on future growth, earnings and inflation expectations. This is a fluid situation that is changing across the globe daily. Truthfully no one has a concrete idea of how this will unfold and as a result, there is a lot of uncertainty in the minds of almost everyone. Uncertainty is a difficult place to make decisions from and therefore the knee-jerk reactions we are seeing across the world are just that decisions made in uncertain conditions. Although we all want to know the outcome of this pandemic and its impact on our lives and investments at this point, we have to be aware that by the time you read this email the status quo is likely to have changed, highlighting the fact that no one can give you the answers we naturally seek. Not to leave you up the proverbial creek without a paddle we can let you know the following:


  • Our investment team is fully functional and the business is operating normally (albeit considering social distancing and business continuity risks).

  • History has a way of repeating itself, we can learn from it and take guidance from it.

  • This is not the first global health pandemic we have seen, therefore, this gives us some guidance into how markets and assets should behave (noting the differences being experiences currently).

  • This is also not the first global market crisis, there are many we can look to. The cause of each is different but the result and response often surprisingly similar. At times like this, we need to look into the review mirror to get some guidance.

  • We are encouraged by the speed and magnitude of reactions being implemented by Central Banks across the globe in the form of monetary policy which is being accompanied by swift suggestions of fiscal stimulus being applied by many governments, all to get ahead of the slowdown in expected global economic activity and the impact on consumers across the globe.

As mentioned above, looking into the rear-view mirror provides us great context into how capital markets tend to behave whenever faced by any kind of crisis. No two crisis environments are identical and their catalysts can vary greatly but the reaction of the markets and the impacts on global economies are surprisingly similar in behaviour and direction (if not magnitude as well).

History repeats itself over and over again, but most of us have short memories ~ Mike Colter

Today, we will look at the largest US equity market draw-downs in history and how equity markets have behaved in the years immediately after the draw-downs. The importance of the message cannot be stressed enough!


Source: A Wealth of Common Sense

The take-home points from the image above are and should be the following:


  • The current market pullback is bad but we have experienced far worse in the past.

  • The returns over the next 1,3 and 5 year periods after all these pullbacks has been significantly positive.

  • Missing the market recovery in year one from the bottom of the market will have a long term impact on your performance and therefore being out of the market is not a strategy worth following.

  • Timing this turnaround perfectly is highly unlikely and therefore being in the market even at the bottom is hugely important.

  • The market prices in good news as fast as it prices in bad news near the bottom of the trough.


To give you further evidence below this image is another showing the performance of equities immediately after the 2008 Financial Crisis, which is the second-worst drawdown of the time-frames measured below).


Source: Koyfin

The second image shows you how much better off in the subsequent 5 years you would have been remaining invested in equities relative to an investment in cash/money market instrument. What is the moral of the story to the second image? After experiencing the full extent of the drawdown (or a significant portion of it) switching into cash is a losing strategy which will set you back as an investor far more than doing what you should do in these market environments, which is to remain invested no matter how uncomfortable.

This time is different from the past but not as different as you think...

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