How stock markets perform after heavy falls

Stock markets have fallen steeply in the midst of the global coronavirus outbreak. Analysis shows how the biggest one-day falls in the past have been followed by substantial returns over the subsequent five years.

Recently we put out our updated COVID-19 message to clients, and if you haven’t read this yet, the link is here.

It was written by our Technical Team Leader Dan Willers, and should serve as a welcome break from the sensationalism we often see in the media. It gives a rundown of how your portfolios and financial plans at large have been designed to weather these kinds of market storms, and shows how previous health crises have impacted markets in the short to medium term.

We know it is counterintuitive to sit back and do nothing at a time of crisis, but just as we have been putting ourselves into lockdown, more often than not the same strategy is the best medicine for your investments too.

What next?

We also realise that, as time goes on, more questions and concerns will surface in your mind. In recent weeks, global stocks have endured some of their worst performances since the days of the financial crisis. For instance, UK stocks, as measured by the FTSE All-Share Index, fell 7.4% on the 9^th March 2020.

We’d be speculating if we said that this will pass in no time and markets will bounce back in a ‘V’ shaped recovery. The severity of the disease and its long-term economic impacts are still yet to be seen. However, what we can do is offer some historical data, to show you how markets have responded in the past after significant falls. In these situations, whilst history is not a roadmap it is a compass to guide us in the future.

How stock markets bounce back

Using the US stock market as an example, the past three decades show the strongest five-year rebound brought a return of 164%. That is an annualised return of 21% in the five years after a 6.7% fall for the S&P on the 20^th November 2008 during the midst of the financial crisis.

Of course, past performance is not guaranteed to be repeated in the future. The returns are illustrative and do not include any costs or fees. But the data underlines the historic resilience of shares over longer timeframes, even following shocks.

The US stock market’s ten worst days and their rebounds

Source: Schroders. Refinitv data correct as at 3 March 2020. Data shown is for the S&P 500 Total Return Index, which includes price increases and dividend payments. Returns have not been adjusted for charges or inflation.

Time in the stock markets

As the chart below shows, the stock market has provided healthy returns, despite the ups and downs over the last three decades and providing you remain patient. A $1,000 investment in the S&P 500 at the end of 1988, left alone, could now be worth $22,678, not adjusted for charges or inflation. That’s an average annual return of 10.6%.

How a $1,000 investment could have grown since 1988

Source: Schroders. Refinitv data correct as at 3 March 2020. Data shown is for the S&P 500 Total Return Index, which includes price increases and dividend payments. Returns have not been adjusted for charges or inflation.

The strongest FTSE rebound

It’s a similar picture for the UK’s FTSE All-Share. The strongest recovery from the ten worst days was a 134% five-year gain following the worst of the banking crisis turbulence in the UK on 2 March 2009.

Again, like the S&P 500, the UK stock market has provided healthy returns, providing you can stomach the ups and downs over the last three decades. A £1,000 investment in the FTSE All-Share Index at the end of 1988, left alone, could now be worth £14,016, not adjusted for charges or inflation.

Time to keep a cool head

We can’t stop the headlines from pouring in and causing further worries to surface. But we can promise that we’ll continue to be here, offering calm and evidence-based updates as this crisis goes on. Hopefully this will give you greater confidence and peace of mind over your long-term financial strategy.

It is in these times that a financial adviser earns their keep. We all know what happens when a plane enters bumpy air and how it feels. Fear, uncertainty and doubt. However, the captain comes on the public address system and says:

“This is your captain speaking. We are entering turbulence for the next few moments. I’m turning on the seatbelt sign. Please take your seats. It looks like only a short period of time and we will do our best up here to steer round the heaviest parts.  We will do what we always do up here in the cockpit: make sure your seatbelt is tightly fastened”.

The same is true on your investment journey. Think of RB as your captain, ready, calming and available. However uncomfortable it may feel, turbulent times are inevitable, and we as financial planners understand that it’s all part of the process. The best thing to do is to remain calm.

Also, if ever you feel you need further reassurance, or if your circumstances have changed, your financial adviser is always happy to talk things through – just get in touch.

Data & Analysis provided by Fusion Wealth

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.