The upward trend in the S&P500, i.e. the bull market, has now come to an abrupt end after eleven years. This has been the most-hated bull market ever, because people who were too scared to invest in shares after the 2008 financial crisis, never had a chance to get back into the market and were envious of the people who had just stayed in or had even bought more shares when the market crashed. To put things into perspective, at the bottom of the crash in March 2009 the S&P traded on 683 points.
On 19 February 2020 the S&P traded on 3386 points. That is an increase of 396% or 36% per annum for eleven years. Over the last three weeks, the S&P lost 25% to signal a bear market, i.e. a downward-trending market. This has been the fastest dip into bear market territory ever, indicating that a recession is in the making and we need to learn something from this.
Recessions are inevitable and just like winter follows summer, they will always spoil the party. As investors we never know what the actual event will be that will lead to a recession, and what will be just another false signal. It is therefore not prudent to sell shares when there is a dip in the market because you might have to buy them back a week later at a higher price. It is also not possible to sell shares when the dip becomes a real crash like the one we are having now, because it happens too fast.
The only way to manage this uncertainty is to do the following:
- only put money into shares if you intend to hold on to them for ten years and
- when your shares do give you a good profit, re-balance your portfolio by taking some of the profits and topping up your cash.
COVID-19 has been declared a pandemic and it is an extremely contagious virus. It has reached South Africa (now in state of emergency) and chances are good that it will spread like a wildfire. It is not a death sentence and most people recover quickly, according to most medical reports, but it should be taken very seriously because nobody knows how things are going to turn out.
The reason why it is affecting shares so dramatically is the impact it is having and will continue to have on the world economy. If people stay at home and stop spending, companies will have no income and valuations will fall. Some companies will go bankrupt and even with lower interest rates and all the liquidity the central banks are pumping into the markets to try and avoid this impending world recession, it will help stave off liquidity problems for companies with too much debt, but it will not convince consumers to go out and spend.
So it seems to be clear that the spreading of the virus cannot be effectively contained, and until a vaccine has been developed, fear and panic will rule our lives.