The longest bull market in history has come to an end. And what a ride it was, providing investors with strong returns over more than the decade since the financial crisis. While no one knew when exactly it would happen or why, almost everyone was expecting this to occur. I don’t think anybody predicted it would happen as a result of a global pandemic, which is rapidly shutting down the economy. It’s a shocking way to end a bull run, but there are also reasons for us to be optimistic.
Over the last few years, investors had been lulled into a sense of complacency. Momentum names kept going up, there was no volatility to speak of and anytime the markets were down, even by one percent, buying the dip was the strategy that never seemed to fail. It now feels like a long time ago, but it will return in some form. The events happening around us now are unprecedented in many ways, but they are still part of the natural ebb and flow of markets, even if they’re taking a more unusual form.
The current volatility has been awful – gut-wrenching at times, even. The speed of the drop has made it even worse. The added personal health risk can make this even harder. But we must keep the long-term view in mind. Markets have crashed before and we’ve recovered. Markets will crash again and we will recover again. History has shown us we are incredibly resilient and our systems are as well, even if we’re prone to worry.
In 2008, there was a very real possibility the global financial system would fail. In 2001, after 9/11, it felt like a war on capitalism was upon us. And in 1987, when the markets dropped over 20% in a single day, it felt like stocks were broken forever. The financial system didn’t collapse, capitalism didn’t die and stocks survived. We made it through all of them, just as we made it through the hardships of previous generations.
What has been true is that all of these events proved to be great opportunities to add quality investments. Taking a long-term approach is important. It can feel incredibly counterintuitive when it feels like we’re surrounded by crisis. But seizing the opportunity is crucial when the goal, in its simplest terms, is to buy low and sell high.
No one has the perfect crystal ball to predict all of the market tops and bottoms. The market could go lower from here, but it may also turn higher with no warning.
Equities are supposed to reflect the value of all the information out in the market. At the moment, given the sell-off, they are pricing in a global recession and dramatic cuts in earnings for basically every company. But once things start to stabilize, prices tend to rebound.
Many stocks have dropped over 30% in the last month. What is important is to separate those that have seen their long-term business prospects permanently impaired from those that could be back to normal in a few months. Given the rise of passive investing in the last few years, active management and stock selection strategies should outperform from these events, as they’re able to capture more of the opportunities rather than bulk buying everything.
It’s perfectly normal to second guess what should have been done a few months ago. But no one could predict this. Even the most bearish observers were calling for just a 10% drop. That’s in the past. What investors do next is even more important here. Selling could save investors from further drops, but it will lock in these levels and make it harder to make back losses.
The biggest takeaway from this event is that the world has changed. It always does and sometimes we need an unexpected shock to realize it. For some time, technology has been ahead of the culture. We’re learning that more people can effectively work from home and travel less for business. Attitudes towards those things could change in the future. Many people will likely spend more on healthcare going forward, as well.
We are also entering a prolonged period of lower interest rates, as most central banks have cut to zero. Investors still need income, particularly those that are closer to or in retirement. It’s important to use this window to determine where they can find that income and position accordingly.
All investors need to have a plan and the courage to stick to it. Sometimes we need to adjust our plans based on the latest information. That’s prudent, but it should also be as thoughtful of an exercise as building the initial strategy. Having a plan is crucial because it helps prevent us from making decisions in panic, which can make the pain even worse.
We will get through this and we’ll come out stronger than before. We always do. Stay safe and be kind to one another.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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