“We are not alone in this; we are stronger together and we will get through this together.”
Carl Richards
Over the last couple of weeks, you will have seen the communication from us increase.
We have all worked through different financial crises, and each one is different but there some common traits – fear, irrational thinking and white noise.
What we don’t want to do is add to the din, but rather keep the lines of communication open.
In a period of imposed isolation one particular quote was “we are not alone in this; we are stronger together and we will get through this together.”
So, here goes…..
Risk and resilience
We had a conference with Carl Richards who is a Financial Planner in the US and author of two books: The One-Page Financial Plan and the Behaviour Gap.
The purpose of the call was to discuss how we navigate these difficult times. I also want to intersperse details from another call I took today from Rathbones.
Some of the questions which are coming up during these calls are:
- When will we hit the bottom of the market?
- Will the markets recover?
- Should we take the loss and wait in cash for markets to recover?
- For those with cash, the question is always about whether now the time is to invest
People will have different views but what these all show is the desire for certainty. We are in a period of fear which naturally leads to irrational thinking and the tendency to be dragged into the hubbub.
The point being is that we are all in this together, and yes we are fearful but we can say with some confidence based on history (and assuming history repeats) markets will recover, and that it is better to be in the market rather than trying to time when to enter the market.
Have we hit the bottom of the market?
There is no answer to this, it is only really seen in hindsight.
What we are finding is that the increased market volatility has delivered opportunities to invest in companies at significantly discounted prices. Those managers with cash are drip feeding that into the market to take advantage of those opportunities, but it doesn’t mean we have hit the bottom.
The second question is easier to answer but harder to determine; will markets recover?
History shows that markets do recover. If we go back to 1987, 2000, 2008, 2015, 2016 and 2018 there has always been a recovery. The question is how quickly it happens.
There are currently three possibilities of how this may occur, from Legg Mason, Schroders and LGT Vestra:
- Tick recovery – sharp falls and then very quick and fast recovery
- Bell recovery – sharp falls, bounces around for a bit at the bottom and then comes back up
- Slow recovery – sharp falls, a lot of volatility and then a slower recovery
Speaking to Rathbones they have an interesting take on this and one that is worth considering.
Recession or depression
The general view now is that we will not have a depression like 1929 but we will likely have a recession. Rathbones think it may be like 2008’s but the recovery will be much faster.
A global economy is based on people spending, and people travelling. What has happened is that effectively governments have switched off that facility. At some point it will reverse and there will be pent up demand which will flow back into the system. In the UK and the US, there is near full employment which is different to other recessions. People may lose jobs but there should be availability within the system.
Much of the uncertainty is being driven by misinformation. Rathbones look at data from trusted sources rather than the media and their view is that the UK Government is doing the right things.
In terms of the recovery Rathbones acknowledged that investors want to remove anything uncomfortable because fear is in the ascendency. Removing riskier assets now and waiting for the markets to improve does not mean investors will rush back in. Once investors are out of the market they wait for the certainty to show itself again and can miss the bounce back up.
They went on to explain that this is different to 2000 or 2008 and perhaps more like 1987. Interest rates remain at all-time lows and these are not going up any time soon. Eventually risk assets will be required again and when this happens, they think the recovery could be a v shape especially when you factor in pent up demand.
Being in the market
Legg Mason and Fidelity have both stated it is better to be in the market, than trying to time the market. I am happy to share these with anyone who is interested. As all these fund managers say, it is very easy to cut risk at times like this but there is a potential for a very strong market recovery, and if we are not participating we will miss out.
There are several items under consideration by fund managers:
- China was the first to go – they closed the stock exchange for two weeks, and now everyone is returning to work. If the UK trajectory remains lower than Asia and Europe, then potentially we could come out of this quicker than is projected
- Stock markets – it is unlikely a 2 week shutdown will happen in the west, but it could. There are however ‘circuit breakers’ which pause trading in markets which have been deployed already, as well as temporary bans on short selling certain companies
- Government and Federal Banks – money has been pumped into the system, and we wait to see how this feeds down into small and mid-size businesses. The general view is positive about the actions of the UK government and we can expect more to come. Denmark has also made radical changes to wages and eyes are now focusing on the US. The view is that Trump has reacted poorly but they will get it right eventually
Communication, communication, communication
There is so much information available and it is often hard to tell fact from fiction. When markets swing from day to day it can be unnerving, but at some point the negative sentiments will reverse. Much will depend on when coronavirus peaks, the actions of governments (and what they put in place) and when countries go back to normality.
LWM is sticking to our process; our focus is not on the day to day but on the next three, five- and ten-year view.
We know that people will be isolated from friends and family and many of you have been in touch with us already, please continue to do this. We are here to help.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.