UNDERSTANDING MARKET CYCLES
It certainly has been extraordinary times, with much uncertainty and market volatility. We know this is a heightened time of anxiety and fear. Many investors currently feel the need to protect their savings and move their various investments into cash. History teaches us that very often investors switch at the wrong times,eroding possible returns for the future. One’s emotions often cause one to sell when markets are cheap (after acorrection) and buy when markets are expensive (after a strong recovery). Our advice is always try and stick toone’s original investment plan and time horizon – markets go through cycles, bull and bear phases. Markets do recover, and often very quickly.
We have set out below the past bull and bear cycles both for South Africa and the United States. These graphs look at the past 100 years and show bull, bear and recovery markets. Bear markets are defined as market falls of at least -20 percent. You will see that bear markets happen consistently over time, but so do the market recoveries.
The second pair of graphs show both the SA and US equity markets since the start of the year. Not many people realise that since their low point in March, both domestic and US equity markets are up over 22%.
Be patient and stick to one’s long term investment plan.
The table above sets out the bear markets that South Africa has experienced over the past 100 years – BEAR markets being defined as falls greater than 20 percent. The key takeout is noticing how in most cases markets rebounded quickly and very soon made up the previous highs (RECOVERY PERIOD) and then continued to provide strong real returns. (BULL PERIOD) The rebounds tended to be very quick and followed by several periods of lengthy positive returns for several years. It is for this reason why we encourage investors to stick to their investment plans and time horizons and to not give in to the natural human emotion of fear and liquidate near the bottom of markets.
SA equities have shown a strong recovery since 19 March on the back of a more positive global outlook regarding governments and health authorities gaining better control over the outbreak of the COVID-19 virus. It is too early to know whether this is the case or not.
Over the past decade US equity markets have had an extremely long upward cycle – the longest bull market recorded. The US recovered strongly post the Global Financial Crisis with the economy showing consistent strong GDP growth. During the recent market correction in March 2020 US “quality” equity stocks held up well. These are businesses that have strong balance sheets, large amounts of cash, large market shares and tend to be price setters.
There are still high levels of daily volatility within global equity markets due to uncertainty by investors in terms of the length of the economic shutdown and its full impact. Sentiment has turned more positive as COVID-19 numbers seem to be improving. What is certain is that as governments begin to “unlock” their economies, theywill have to do it in a gradual and measured way. In the short term, equities have staged a strong recovery up 26% in the past three weeks.