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Should you hold tight or sell – the current state of the share market


Should you hold tight or sell – the current state of the share market

The word ‘volatility’ is one we have become very familiar with over the last few months. During a crisis, it can be expected that we’ll experience an increase in market volatility as a result of the economic uncertainty. To some investors this might sound like the ideal time to get out, but is exiting a falling share market really the best strategy?

Are we in a recession?

A recession is defined as a negative decline in the economy over two successive quarters. Whilst many acknowledge we are hurling towards a forced recession; this doesn’t necessarily guarantee long term doom and gloom, as each recession is defined by its own severity and length. The biggest fear people have when they think “recession”, is the job losses and Centrelink queues that became common place in early 90’s. Whilst we have seen Centrelink queues forming recently for the JobSeeker payment, time will tell if these queues are just a temporary side effect of our enforced isolation.

What caused the stock markets to fall during COVID19?

Following the initial shutdown of factories in parts of China, fears across the world started to spread that a slowdown in the “world’s manufacturer” would lead to serious supply issues around the globe. Since then, we have witnessed a shutdown in most countries, which has had a major impact on those economies, businesses and employees that are unable to operate as normal – at least temporarily.

The increasing levels of unemployment that we are currently experiencing worldwide is different to the unemployment we would typically experience during a recession. Many businesses aren’t having to reduce staff incomes or make them redundant due to poor trading; they’re doing so as a result of government restrictions.

This spike in unemployment has caused a reduction in consumer confidence, reduced discretionary spending and a decrease in job security. These factors have hurt businesses revenues, which in turn impacts companies’ profits and therefore the payment of dividends. Sprinkle in a healthy dose of panic, and we have a fire sale across share markets around the world.

How do markets behave following a crisis?

History has taught us that share markets are driven by volatility in the short term, however the long-term returns tend to be very consistent. Below is an example of some key events that have impacted the Australian and Global share markets and the resulting rebounds after each event:

Market decline from crisis

This graph from Fidelity International, shows the consistent growth in Australian and Global markets over the past 30 years. Whilst there are significant events in history that have caused declines in the markets, over the long term both markets have rebounded as evidenced by a 9.22% p.a. growth rate in Australian shares and a 7.17% p.a. growth rate in Global shares.

Not every crisis is the same – short term v’s long-term events

September 11, 2001 – When the tragic events of September 11 took place, there was a decline of 7.1% on the US share market which was the largest recorded loss in one day. One week later that fall totalled 14% and an estimated $1.4 trillion of market value was lost. While this may seem substantial, no more than one month following the attack had the Dow Jones, S&P 500 and NASDAQ recovered to their previous market values.

Global Financial Crisis (GFC) – In 2007, the subprime lending crisis engulfed the world markets leading to the 2008 event we know as the GFC.  Mortgage backed securities originating from America (many of which were taken out by borrowers without jobs), were packaged up and sold onto financial institutions throughout the world. When the merry-go-round of free money eventually came to a grinding holt in these US cities, stock markets, banks and pension funds throughout the world caught a major cold. Australia’s own S&P/ ASX 200 fell 55%, after reaching a peak of 6,800 points in October 2007. It wasn’t until 10 years later (2018) that the Australian share market had fully recovered it’s lost ground.

Are we looking at a V, U or GFC shaped recovery?

Whilst both September 11 and the GFC had a major influence on world share markets, there was a significant difference in the length and severity of each event.  Most experts predict that in a COVID19 world there is likely to be greater volatility as we work our way through the many challenges, but provided the majority of governments and companies worldwide can return to work in a similar capacity within a reasonable time frame, many believe that the recovery will resemble more a V or U shape, rather than the GFC.

One of the key reason’s experts are predicting this type of rebound is the sheer volume of money and liquidity that is currently being pumped into the world markets by governments. Normally a sharp rise in unemployment would spell long term trouble for share markets, however due to initiatives such as JobKeeper and JobSeeker (plus the many other initiatives worldwide), people are managing to get by. Those less impacted are saving more than ever as they are unable to spend all their money during isolation.

As employees and businesses start to return to some normality over the coming months, and green shoots begin to appear, those investors currently sidelined will become active. With cash and bond returns at record lows, expect investors looking for a genuine return to head towards property and shares – something particularly relevant for retirees requiring an income stream to fund their lifestyles. The more money that gets pumped into the share markets, the more likely we’ll see a quick return to pre-Covid market values.

Conservative versus high growth investment strategies

Generally speaking, a more aggressive investment approach consisting of shares and property, has resulted in higher  annual returns over the long term despite the increased market volatility experienced.  An example of this can be seen when reviewing  the SunSuper pre-mixed investment returns (below), which shows the long term benefits of holding a high growth strategy over a conservative strategy. A superannuation high growth strategy mainly consists of Australian and International shares, plus Australian and International property assets. A conservative strategy typically holds a smaller percentage of these growth assets, along with more defensive assets such as bonds and cash.

SunSuper p.a. returns 1 years 5 years 7 years 10 years
Conservative -0.63% 3.82% 4.81% 5.10%
Balanced -3.91% 5.08% 7.41% 6.83%
High Growth -5.38% 5.34% 7.72% 7.06%

 

Whilst the conservative portfolio above might seem like the best option due to having the lowest levels of negative growth in the current 12-month period,  the high growth strategy proves the more effective strategy over the long term. These returns are not unique to SunSuper, review the majority of other superannuation platforms pre-mixed investment strategies and you’ll find similar results.

Remember your investment long term objectives

When investing, it is important to remember your long-term investment strategy. Billionaire investor Warren Buffett has a famous quote “if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”. For anyone under 50 years old managing their own superannuation investment strategy, this is particularly true.

By its very nature, superannuation is a long-term investment strategy so investors with a 10 year plus investment timeframe should think carefully before switching to a more conservative investment strategy. Whilst market volatility can be scary to watch, switching to defensive strategies can prove costly, particularly considering the current state of interest rates and bond markets around the world.

Disclaimer

The information in this article is general in nature and does not constitute personal advice. For some individuals changing to a more conservative investment strategy could be the best move based on their personal circumstances. We recommend you speak to the Montara Wealth team or your trusted advisor before undertaking any investment changes.

 

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