Looking at the history of market cycles brings context to the present Covid-19 market correction. Although the extent of the pandemic is unprecedented in our lifetimes, we can have confidence that we will return to another period of growth.
The ups and downs of the market cycle are a completely normal part of market behaviour. When we’re enjoying a period of strong investment performance, the question is when, not if, we will go back into a decline. The long-term returns of a successful investor are compensation for withstanding the bumpy journey.
Bears and bulls
The question of whether this time is different is on a lot of people’s minds right now. Even a neighbour that will be getting his letter from the Queen next week for having reached the grand age of 100, hasn’t previously experienced a global pandemic in his lifetime. Being concerned from both a humanitarian and financial wellbeing perspective, is only natural.
The same question was worrying people during the Global Financial Crisis in 2008. The prospect of overcoming the potential collapse of the financial system was beyond comprehension. But history has shown us, time and again, that despite many human, financial and natural disasters, the market makes progress. The unknown is the timescale for this.
Over the long term, market cycles fall into two categories: bull markets and bear markets.
Bull Market – a 20% gain from its low point
Bear Market – 20% decline from its high point
Since the high point on 20 February, world equities have fallen 33% to a low point on 23 March. Subsequently they have recovered 34% 1. This table below shows the history of bull and bear markets from 1900.
There are a few important observations we can draw from this.
- Every bear period has been followed by a bull period
- For every year in a bear market, there have been over six years in a bull market
- The average bear market has been 1.3 years, compared to an average bull market of 7.9 years
- The chart includes the period of the Spanish Influenza pandemic which began in 1918 and is estimated to have infected around 500 million people and caused 50 million deaths
Looking at the chart allows us to put our current position in context. In March, we hit bear market territory faster than ever before. By April we were back into bull market territory, making the preceding bear market the shortest on record. As with all short-term market movements, neither could have been predicted.
It’s important to remember that the current market turnaround doesn’t prevent us from slipping back into a bear market. Anticipating further declines means they will come as less of a surprise if that’s what we experience in the weeks ahead.
Whilst you will have seen a decline in the value of your investments, this only becomes an actual loss if you sell your investments. Otherwise it’s just a temporary decline, and feedback from clients tells us that their valuations are higher than they had expected having seen media reports on the market falls.
What’s it going to take to recover?
The market volatility we have recently experienced has resulted from a global health crisis, rather than from the more typical ebb and flow of the market cycle. Whilst we can’t be sure, most believe we would still be in the midst of the longest bull run in history if it wasn’t for the Covid-19 pandemic.
No doubt the current bounce we have seen in market performance is driven in large part by the unprecedented stimulus packages that developed economies have introduced. But what happens next is likely to depend on how effective government strategies have been in slowing transmission of the virus and restarting economic activity.
Life will only return to ‘normal’ when most people feel safe and the reality is, no-one is safe until we’re all safe. This means businesses will be fully operational, people will feel comfortable with spending money on non-essential items again, organisations will be able to recruit again, and money will start to move more freely. Investment prices are driven by expected future earnings, which relies on the companies we invest in making money.
What’s it going to take for us to feel safe?
Feeling safe means believing there’s a low probability that we ourselves, or our loved ones, will get seriously ill by returning to our prior routines. The three most likely routes to this are:
- Covid-19 runs its course
- There is a treatment that substantially improves the mortality rate, or
- There is a vaccine
Depending on what you read, watch or listen to, there’s a vast range of views available on each of these topics. Whilst well informed people will tell us that it isn’t possible to produce a vaccine in less than 18 months, we also know that never before in humankind, has there been a time when such financial resources and the collaboration of the best minds in the world, have been exclusively dedicated to finding a solution to help us all to feel safe again. Humanity is a powerful force to be reckoned with.
The reality is that no-one knows how this pandemic will play out, or the impact this will have on the investment markets in the short-term. But history shows us that bull markets always follow a bear market. We just don’t know when.
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
- Note that because the starting point is lower, a 34% recovery does not mean we are back where we started. As at close of play on 2 June 2020, the MSCI World Index has fallen 9% since 20 February 2020.
- Notes: Calculations are based on FTSE All Share (GBP Total Return). A bear market is defined as a price decrease of more than 20%. A bull market is defined as a price increase of more than 20%. The plotted areas depict the losses/gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index. Time period: 31 January 1900 to 31 December 2018. Calculations based on monthly data. Logarithmic scale on y axis. Source: Global Financial Data. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall or rise and investors may get back less than they invested. Issued by Vanguard Asset Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority. © Vanguard Asset Management, Limited. All rights reserved.