This time last year Mrs S and I were heading off to Alentejo for a week of good food, wine and late winter sunshine. Thank goodness we did. It’s hard to remember the carefree, hop-on-a-plane world we took for granted just 12 months ago.
Obviously, I didn’t know at the time that the world’s stock markets were about to experience one of fastest bear markets on record. Investors were quick to pay attention to what we weren’t yet calling Covid-19. Quicker than us, I’m embarrassed to relate. Oh, how amused we were by the facemasks at the airport.
This Friday coming is the anniversary of the S&P 500’s peak on February 19. Within two weeks, the US benchmark had corrected by 10pc. Within four weeks it was in bear market territory, down more than 20pc. We didn’t know it at the time, but five weeks after the peak, it was all over. Since March 23 last year, US shares have risen 75pc.
I get plenty wrong about the markets, so you’ll forgive me if I revisit the headline on this column five days before the bottom: ‘This is a once in a generation buying opportunity.’ Happily, I followed my own advice. What a shame then that I backed the recovery with a UK, not a US, tracker – there’s a big gap between 31pc and 75pc. Hey ho.
Clearly there is always something to learn in this game. And the past year has provided more than its fair share of lessons. Here are eight things I’ve taken from a remarkable 12 months in the markets.
1. Markets and the economy march to different drumbeats. If you think your investments reflect what is happening in the world today, you will still be sitting on the side-lines. Fortunately, they don’t. They are shaped by what investors think the world will look like tomorrow – and despite the terrible toll the coronavirus has taken, the future looks no worse than it did a year ago. Just very different.
2. Not all bear markets are created equal. The V-shaped recovery last year surprised us all. It traced a completely different path from those in the big bears of 2000 and 2008. This is because, to repeat Goldman Sachs’s helpful framework, it was event driven, not cyclical or secular. In other words, it was caused by an external shock that briefly stopped but didn’t fundamentally damage the global economy. The recoveries from bear markets caused by a monetary squeeze or the unwinding of financial excesses are significantly slower and shallower. The better analogues for the pandemic plunge are 1987 and 1998. Painful but quickly done and dusted.
3. It’s all about liquidity. The key difference between 2020 and earlier crises has been the speed and scale of the monetary and fiscal response. If Joe Biden gets his stimulus package through Congress, the US will have spent USD$5trn or 25pc of GDP to support its economy in the past year. That determination to do whatever it takes has not been seen since the 1940s when big government and a compliant central bank last joined forces in this way.
4. Economics is politics. The last year has confirmed that the economic levers you pull in an emergency – and how you sweep up afterwards – are political choices. A sovereign country with the power to print its own currency is not constrained by anything other than fear of the consequences. If you want to drop pound notes from helicopters you can. It has to be paid for, of course. Whether you choose to do that through austerity or higher taxes or inflation is up to you – and the people that vote you in or out of power.
5. Plus ça change. (The more it changes, the more it’s the same) Markets are cyclical, trends go on for years at a time and moments of crisis such as we have experienced in the past year are often the trigger for a change in direction. So, there is plenty of talk today of rotations and new super-cycles, of value picking up the baton from growth, of the revival of smaller companies, the end of the road for tech stocks, commodities taking the lead. Some of these shifts will happen. One thing that the last year has clarified, however – as I proved to myself last spring – is that, as an investor, you bet against the US at your peril.
6. Sustainability matters. You might reasonably have thought a year ago that focusing on environmental, social and governance (ESG) factors was a luxury to be enjoyed in calmer markets. You would have been wrong. Investing for good turned out to be synonymous with good investing. Companies with better ESG credentials are, it seems, just better companies. I suspect in five years’ time we won’t even think of sustainable investing as a distinct activity.
7. Asset allocation matters too. In less volatile times, there’s less to be gained by picking your fights. Just taking part is all that matters. The last year has shown the importance of being in the right place at the right time. I chose the wrong market last March. Investing in individual shares, I could have been equally blindsided. £100 invested in BP at the bottom is still worth £100. The same amount in Ocado has doubled.
8. And finally – we just don’t know what’s around the corner. If someone had described the next 12 months to us a year ago, we wouldn’t have believed them – neither the good bits nor the bad. That has implications for us as investors, obviously – be prepared, be diversified, be humble, expect the worst but hope for the best. But it scarcely needs pointing out that the last year has been a more general wake-up call too. You don’t know what you’ve got….
Article by Tom Stevenson – Investment director at Fidelity International. The views are his own.
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