Market turmoil – panic is for those without a plan

Why panic is for those without a plan

Ok, its officially a market correction, with the US ‘S&P 500 index’ down today {close of business GMT} over 25% since its high on 19/02/2020. The main factor causing this slump is the uncertainty from the health risk to the world population caused by a Global Pandemic* ‘COVID-19‘. (*WHO announced a Pandemic, 11/03/2019). This time round there is no finger pointing at financial institutions for poor credit underwriting ‘Sub-Prime Housing Lending’.

Yes, the Global Equity markets could well get worse before it recovers, (which it will inevitably) but the pressing question is when? To put this current equity market meltdown into context the last severe sustained market correction from 26/10/2007 to 13/03/2009 saw some c. 50% wiped off global equity market values {Ref: S&P 500 Index}.

Any market investor who saw their Pension Investment pot contract by nearly half in 2008/09 and who remained ‘battered and bruised’ on the ‘side-lines’ having switched equity funds to cash would have missed out on the strong market rebound of c. 230% increase { from 03/2009 to 12/2019, ref: S&P 500 index ) from that equity market floor (market bottom) in 03/2009. • The US has declared that all travel from the EU is being suspended for next 30 days except for the UK & Ireland.

What will cause an equity floor to this current market panic and equity contraction is demonstrated verified figures showing that the COVID-19 virus has been contained in developed countries and infection rates subsiding.

So what can we expect in the next few weeks and months, inevitably Global corporates earnings seasons in Q1 & Q2 will be weak for many {think airlines, hotels, tourism, oil and financials} as supply chains are delayed and bottlenecks develop, equity markets though may not feel the full brunt of this general market sell off as accommodative intervention measures by both the ECB and the Fed ( further interest rate cuts and fiscal packages) are made available to companies and industries most affected. The German Government on 11/03/2020 unveiled an unprecedented support package for business of €12 bn. 2

Reasons to be optimistic

So, what action should an individual Pension Investor take in these uncertain times. Remember the mantra ‘that markets go up c.75% of the time and down c. 25% of the time’. We are in a contraction period now, with no certainty that the floor has been reached. For some their initial reaction will be to exit all equity related pension fund positions and to convert to cash. This makes limited sense for long term pension investors who are greater than 10 years away from retirement. A pension by its nature is a long term investment, so sit tight, review your current allocations with your financial advisor {allocation weighting between, Equities, Bonds, Cash, Property, Alternatives}, if you are within 5 years of retirement, confirm with your financial advisor that your investment strategy reflects your gradual risk reduction {reduced Equity weighting with increased weighting towards lower risk Government & Corporate Bonds and Cash) aka ‘life styling strategy’. If you are not satisfied that your pension allocations are sufficiently insulated from current market correction, then please contact the undersigned advisor at Imperius Wealth for an initial free Pension review.

For a large cohort of Pension Investors {those > 10 years before retiring} they should take comfort in the fact that over the longer term Equity markets have consistently performed better than other asset classes, this is known as the ‘equity premium’ {Over 30 years period : 16/02/1990 – 14/02/2020 the S&P 500 index has grown over 10x; / for 20 years period: 18/02/2000 – 14/02/2020 the S&P 500 index growth was > 2.5x Ref: S&P 500 chart index below}.

Many Pension Investors will also take satisfaction in the fact that they are invested in ‘Multi Asset’ portfolios – with investments spread across several asset classes, improving asset diversification and reducing equity concentration risk. Multi Asset Funds include Equities and Property {Higher Risk}, while Cash, Bonds and Alternative investments {lower risk}. There has been a significant rise in the ubiquity/popularity of Multi Asset Funds since the Financial crisis in 2009, where many investor portfolios were heavily concentrated in Equities and Property.

Bond investors {many pension investors} are benefitting from this flight to quality and have seen capital values appreciate in their bond holdings as bond spreads continue to tighten.

S&P 500 Chart Index 

 

So, is there an opportunity to take advantage of this market correction? and can you time the market? The answer to those questions is Yes and No! not even seasoned investment experts can time the market and if by chance your asset manager has /can, its often pure luck. So 3 don’t try to time the market, the advice is to stay invested, draw a line in the sand on a target market sell-off of say 25% or 30 % and then start to invest on an opportunistic basis using ‘unit averaging’ investing. Investing into a falling market {aka ‘catching a knife’} is for the brave, but to use that adage ‘fortune often favours the brave’.

What would the great Investment guru ‘Warren B’ do now? A volatile market has sold off 25% in the last three weeks, it’s a red or black decision, the markets could fall more, but by purchasing an equity index now and spreading the investment over a period of time, achieving unit cost average purchase price, Warren B might invest today $10,000 in the S&P 500 index at say an index price of 2,526 and tomorrow invest a further $10,000 at 2,490 and another $10,000 at 2,450 on 16/03/2020. With unit cost price averaging, he has effectively invested $30,000 in the index at a unit cost average price of 2,488. He can sit tight for a market rebound.

 

 

As a buy and hold investor, falling markets represent an opportunity to buy in at cheaper levels. It’s not for those without conviction and only individuals that can afford to lose their full 100% investment should contemplate such action. Investors though should take comfort from the long-term Equity market growth trend, which trends upwards from left to right. {Ref: 30-year S&P 500 Index: 16/02/1990 to 14/02/2020 – shows growth of 10.1x, while the 20-year period the S&P 500 index growth from 18/02/2000 – 14/02/2020 was 2.51x}.

 


Ref: S&P 500 Index

In summary

This equity market correction has been predicted and many market commentators would say overdue, it’s been one of the longest equity bull runs in history, what has caught market participants left side though is that this time the catalyst for a steep correction has been caused by a global pandemic. In Developed economies, Governments are largely united in their approach to containment of the ‘COVID-19’ cancelling mass gatherings (sports, concerts, etc), school closures, pubs, while business has facilitated and encouraged employees to work from home to reduce the pace of the coronavirus spread. The effect on corporates earnings from this contraction and production slowdown will not be seen until US Q1 earnings season {commencing mid-April on} and the duration of this slowdown and correction could still be at least 3-6 months away.

Pension Investors should arrange a review of their fund holdings with their financial advisor and establish whether they have the risk appetite and capacity to opportunistically benefit from this market correction. I re-iterate that for a long-term Pension Investor {> 10 years to retirement} this correction represents a ‘buying opportunity’.

Andrew Cree

Andrew Cree

Senior Financial Planner

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