Whilst we have not experienced many global pandemics in our 114 years as a firm, we have seen our fair share of stock market crashes. Although none of the current Cave’s team were working (or alive for that matter!) during the Wall Street Crash of 1929, some of the ‘old guard’ do remember 1987’s Black Monday, when the Dow Jones fell 22% in one trading session, and a few more have tales of the dot-com bubble bursting in 2000, which saw the NASDAQ fall 78% from its peak over two years. More recently still, most can recall the financial crisis of 2008, caused by systemic weaknesses and over-leverage in the financial sector, which led to a global recession and contributed to a European sovereign-debt crisis.
Despite the magnitude of these crashes, in each instance stock markets eventually recovered. Even the worst bear market in recent history, which started in August 1972 and wiped 72% off UK stock markets, returned those remaining investors to profit by July 1975 as markets went on to double.
The Covid-19 crisis is of course unique in that it has been catalysed by a health, not a financial, crisis. Q1 2020 saw the sharpest economic shock in modern history, along with some of the fastest stock market declines of all time. Panic sellers met with a severe lack of liquidity in the market, exacerbated by dealing desks operating ‘remotely’; without doubt this played a big part in distorting prices, forcing markets lower.
The response (both in size and speed) from central banks and governments has been unprecedented. Interest rates have been slashed and the quantitative easing engines once again fired up to support bond and, in turn, stock markets, whilst businesses and the labour market received fiscal backing to mitigate both the effects of the Covid-19 outbreak and soften the economic impact of the lockdown measures. Markets have reacted positively to these policies in recent weeks, as news flow around the pandemic has slowly improved and a cautious optimism that we are perhaps nearing ‘the peak’. It is too early, however, to know if a base has been formed from which a sustainable recovery can develop.
So, what have we learnt from previous crises? As uncomfortable as it might be when share prices are sliding, history and experience tell us that it is usually prudent to hold tight and withstand such volatility rather than rush for the exit. As the old adage goes, it is ‘time in the market’ rather than ‘timing the market’ that drives long-term investment performance.
Undoubtedly many people will be unsettled by the current environment; ‘DIY’ investors may find themselves paralysed by uncertainty in these volatile markets, as the basic human emotions of ‘fear’ and ‘greed’ become increasingly amplified. Through using our comprehensive wealth management service, which combines carefully considered long-term financial planning with our discretionary portfolio management capabilities, these emotional influences can be mitigated as it becomes our responsibility to navigate clients’ portfolios through this most difficult of times.
If you would like more information on our wealth management services, please contact Ed Caswell on 01604 621 421 or ecaswell@ caves.co.uk. Ed was recently named in the Citywire Wealth Manager magazine “Top 30 Under 30 class of 2020”, in recognition of his academic and professional achievements, as well as his responsibilities within Cave & Sons.