As humans, we have a tendency to focus on the negative. Behavioural economics has found that losses tend to have a bigger emotional impact on us than gains of the same amount. It is a bias called ‘loss aversion’, and it affects us at a primal level. It helps to explain why bad news is often seen as more ‘newsworthy’ than good news, and therefore why the media can end up giving us an overly pessimistic view of the world.
In light of this, we wanted to bring some balance to the picture. Not to downplay the severity of the global health crisis we currently face, but to highlight some of the positive developments that may have been lost in the negativity in recent weeks. So here are four silver linings you might like to consider, especially if you’ve been concerned about your financial situation lately.
1. Markets rose in April
More often than not, markets tend to rise over time. But when they fall, it can be sudden, a phenomenon some in the industry call ‘up by the stairs, down by the lift’. This is why falls make headlines, while rebounds typically happen quietly in the background.
2020 is no exception to the rule. Since 13th March 2020, when markets took their steepest tumble in decades, the FTSE All Share has grown 6.21%, and the FTSE 100 is up by 7.23% (as at 4th May 2020). In April, US stocks rallied with one-month gains not seen since 1987. This news has been barely covered outside the financial press. We may not be back to where we were, but the upward trend is encouraging.
2. We are beginning to adapt and respond
Markets are information supercomputers, and they tend to reflect or ‘price in’ events that are expected in the coming weeks and months. When markets fell in March, this reflected the fact that many Western countries were about to go into government-imposed isolation.
Many countries globally are now ‘past the peak’, with widespread falls in both new infections and mortality rates. Global research efforts are ongoing, and there are early signs of progress. The US Food and Drug Administration has just approved an anti-viral drug that early research has shown to be effective in treating COVID-19, and UK researchers recently began clinical trials to test a possible vaccine.
Now markets are starting to climb again, this could be read as a sign of optimism for the month ahead (though we are duty-bound to point out: markets aren’t a crystal ball, and you can never guarantee what they will do next). We are not out of the woods of course, but it does appear we are moving in the right direction.
3. Your portfolio might not have fallen as far as you think
Our financial advisers say they’ve been hearing a similar remark from clients in recent weeks. It goes something like this:
“Oh, I just haven’t dared look at my portfolio. I’ve mentally accepted my investments have probably gone down by a third, but I still can’t bring myself to look”.
On the one hand, we applaud not looking at your portfolio during a downturn, as this helps you avoid making rash decisions you later regret. But the news might not be as dismal as you fear. The sharp falls reported in the media were typically in relation to the FTSE 100, which fell 27% between the 20th February and the 13th March.
Over the same period, the average Medium Risk portfolio we recommend to our clients dropped by around 15%. As you might expect, higher risk portfolios fell a little bit further (by 18% on average) and lower-risk ones were more cushioned, declining less than 8% on average. After the rebound is factored in, most of our client portfolios are currently down by between 4% and 16%.
4. This is not another 2008
Consumer demand has been significantly impacted by the government restrictions put in place to halt the spread of the virus, and this has naturally put the economy under strain. But it’s also worth remembering that the current financial system is a lot more robust than it was during the 2008 financial crash.
Thanks to the regulators, banks are sitting on huge safety buffers to protect themselves (and the wider economy) from sudden and unforeseen market shocks. The Bank of England has hooked up the UK economy to the most powerful life support it can muster – an historically low base rate of 0.10%, plus further rounds of asset purchasing to boost the amount of cash in circulation. These actions will stimulate the economy, support asset prices and keep borrowing costs in check. This in turn helps the government to finance its support for the millions of people and businesses who would otherwise struggle financially as we navigate this period.
The US and European central banks have adopted similar approaches to the Bank of England, in a drive to stimulate their respective economies and help keep people financially afloat.
And finally…
Times like these test our ingenuity to the limits, and there’s every chance that a flurry of innovation and positive reforms will emerge on the back of the current situation. No-one would wish for a global pandemic, but large-scale emergencies can band people together and accelerate positive change in ways that aren’t always possible in times of stability and relative comfort.
At Robertson Baxter, we continue to monitor new developments, both in the markets and in the latest government guidance and legislation. And we remain ever vigilant when it comes to managing risk and looking out for your best interests. As we progress into May, we feel that there are reasons to feel hopeful, despite the uncertainty, and that bad news is never the whole picture.
Stay safe, and we’ll keep you posted.
All performance figures sourced from FE Analytics unless otherwise specified.
All forms of investing put your capital at risk. Past performance is no guarantee of future returns, and the value of your investments can fall as well as rise. If you do not understand the risks associated with your investments, please contact your adviser as soon as possible.
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