Chris Bailey – After Lockdown

‘We know what we are, but know not what we may be’ – William Shakespeare

I was on one of those dreaded Zoom videoconferencing calls a couple of weeks ago, trying to ensure that my ‘lockdown hairstyle’ was suitably greased down to look at least mildly professional, when another participant made an observation about the world’s economy that ‘there was light at the end of the tunnel’. Quick as a flash, another participant interjected ‘but that is just the train coming towards you!’

Different opinions are what makes the world go around. You can certainly see such realities in the last couple of months on the world’s financial markets. After the losses in March, the month of April saw some strong advances, driven by the hope that as plentiful economic, market and even health crises have shown across history – human ingenuity over time tends to win out. The trouble is – a bit like my conference call friend above – you can always find a pessimistic interpretation.

Here in the U.K. – and much of the rest of the western world – we are about to embark on the next stage of the crisis, where lockdown restrictions are progressively eased. Challenges, uncertainties and changes to some kind of recent historical normal life will remain plentiful for individuals, businesses, governments and financial markets. Expect a continuation of volatility and also over the next quarter, some record falls in economic growth levels in the western world. The better news is much of this is anticipated and some of the economies of East Asia have given us some insights on what to both undertake and expect.

Financial markets will inevitably lean on virus and associated healthcare driven realities over upcoming weeks and months. There will be good and bad days for both financial markets and different asset classes. Concepts you will be very familiar with including diversification and an investment allocation appropriate to your life plan will continue to be extremely important. However the most important will be staying the course.

A decade or so ago, a book called ‘The Invisible Gorilla’ was published by a couple of cognitive psychologists. You can find some of their experiments searching their book title on the internet. If you watch one, you will see that the general conclusion is that anyone who is focused on one thing can easily overlook something else. This is certainly a concept that can be fully applied to the financial markets.

Taking too pessimistic a view on the world’s financial markets is like taking a negative view on human ingenuity over time. After all concepts such as profits, successful businesses and job creation are all centred on positive change and innovation. There is a reason why typically we enjoy a higher standard of living than a few generations ago, let alone a few hundreds of years ago. I was thinking about this when I came across a fascinating piece of stock market research (https://www.schroders.com/en/insights/economics/downturns-this-deep-can-take-a-long-time-to-recover-from-financially-and-mentally), which looked at previous periods of high uncertainty, specifically when the market in the United States had fallen by twenty-five percent. Before this year, there were eleven such occasions this happened and if you had done absolutely nothing, on average it would have taken you just under three-and-a-half years to get back those losses (and seven of these times were two years or less).

However, maybe you are not a patient person and maybe you worry. After all any really huge fall was – at one time – down just twenty-five percent. Well, if you had shifted to the safety of very safe short-dated bonds (akin to a deposit account) then you would have quelled any extra losses, but it would have taken you over nine years of accumulating regular interest gains to get back to your original pre-losses position. And for the last two twenty-five percent falls (before this year) seen in 2001 and 2008, you would still be underwater (as interest rates have typically been low and getting lower over the last twenty years).

Is there a better option? Well what about putting more money into the markets after the big fall? A couple of scenarios for this were worked out on the basis that an additional 5% of portfolio value is added every year. Even when you (correctly) adjust for the injection of these extra investments, so you are working out when a portfolio gets back to its pre twenty-five percent fall value plus the value of the additional investments, the three-and-a-half years statistic noted above is compressed to less than two-and-a-half years. And now on eight occasions out of eleven, this period was compressed to two years or less.

Now – as the famous saying goes – historical statistics may not be replicated in the future – but during all these periods of crisis and challenge, many investors were worried that the light at the end of the tunnel was the train coming towards them, or they were too focused on other headlines and activities to notice the opportunity masquerading as the Invisible Gorilla.

Not all of the answers will become apparent in May or even this year but for investors looking out over the totality of the 2020s, there is clearly opportunity after the coronavirus. All you have to do is stay calm, consider new/regular investment flows and believe in human ingenuity over time.

Written by Chris Bailey, Head Economist of the Celtic Financial Investment Committee.

This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.

Please note past performance is not reliable indicator to future returns. 

Your investment may fall as well as rise and you may not get back what you put in.