Over the past few months global markets have been rattled by the impact of the COVID-19 pandemic. While big moves in the stock market are often headline news, and can be uncomfortable for investors, it’s important to consider these against a long-term historical context. Here, we break down the possible effects of the coronavirus on the stock market into the future and what it may mean for your investments.
When the coronavirus became news in late January, it was not anticipated to have a serious effect on the global economy. Fast forward over six months months and things have changed dramatically. Due to the emergence and acceleration of the virus globally, it has caused markets to respond as the realisation set in that the outbreak would trigger disruption to global economic activity. Fear has also been heightened by travel restrictions and cities in lockdown. Financial markets don’t like uncertainty and with many questions surrounding the virus still remaining unanswered, global markets continue to try to price in the longer-term risks.
As the funds on the Moneybox platform track global indices, our investors will see an impact similar to the performance of global markets.
What should you know about market volatility
The impact of the coronavirus on the stock market has been felt heavily, with the S&P 500 dropping 30% back in February/March when the pandemic came to light (24/02 – 23/03/20). Whilst drops feel bad at the time, corrections and crashes have happened throughout history and have many triggers – 1987’s Black Monday, Dot com crash and the global financial crisis.
What you need to know about corrections:
- They’re a 10-20% fall in the stock market
- They happen on average every year or two
- The average fall is 13.7% and lasts for four months on average
- Recoveries (back to levels before the correction) have taken four months on average
What you need to know about a crash:
- They’re a stock market fall of more than 20%
- They happen on average once every four years
- The average fall is 32.5% and last for 14.5 months on average
- Recoveries (back to levels before the crash) have taken two years on average
There have been 26 market corrections since World War II (as of February 27, 2020). However, the average return in the 12 months following these losses was more than 16%.
Don’t forget 80% of corrections so far have not turned into crashes. And while past performance is not a reliable guide to future performance, so far 100% of crashes have been followed by a recovery that more than recovers the fall.
What should you do about it?
While it’s tempting to take action in a downturn, often the smartest decision you can make is to continue as you were. In fact, if you contribute regularly you benefit from the average price of the investments you buy over time – this is known as ‘pound cost averaging‘. When you continue to contribute during a downturn, you buy shares at lower prices, which could be beneficial in the long-term.
We know that riding the ups and downs of the market can be uncomfortable but remember the investing principle of Warren Buffett, the world’s most successful investor: it’s time in the market, not timing the market that is the key to success.
Over the last 20 years (end of 1999 – end of 2019), the FTSE All-World GBP has averaged an annual return of 7.5%, and this includes the crash of 2008. So, tune out of the short-term market fluctuations and noise of the headlines as much as you can. Know your time horizon and focus on your long-term investing goals.