What goes up must come down...and go back up.
Looking to history for hope and proof.
Simon O’Grady, Chief Investment Officer at Kiwi Wealth, is quick to point out that market crashes have happened before as a result of big world events like the coronavirus and always recovered. It’s not something new, but the cyclic nature of the investment world. Weathering the market ups and downs are part of business as usual.
“Over the last thirty years the collective team here has experienced a whole range of market crises going back to the 87’ crash. While the causes are always different, the path is well worn. So, it’s really important to put the latest market troubles in context.”
The cyclic nature of financial markets can be seen in three main phases:
1 The Selloff (aka 'panic')
Generally, it begins with markets on a strong run, assets look pretty expensive but economic fundamentals look okay. Some set of events trigger a rapid loss in confidence. This time it was a combination of slowing economic growth and the Covid -19 scare. Most of the time these fizzle out and markets recover. Every now and then a series of events lead to a crisis in confidence which is what we’re seeing now.
2 The volatile aftermath and a new low (aka ‘what’s the plan’)
Media headlines report markets up 5% one day and down 5% the next. A new low may be made. But gradually, the fear recedes, and winners and losers emerge. Banks and governments work out a plan around things like interest rates, tax and spending and act on it. The highs and lows begin to even out and markets become more stable.
3 The Recovery (aka ‘onward and upward’)
The dust settles, economies get back to work, growth returns, assets look cheap and markets rise. Interest rates stay low and confidence starts to return. Inflation stays low and the outlook improves. Shares rise in value but usually with at least one large correction in this phase.
While no one can predict how long it will be before we move from the ‘sell off’ phase, Simon points to history as a possible indicator.
“Equity markets can recover in as little as 6 months (which it will if Covid 19 turns out to be less of an issue) or 24 months (which is how long it took for markets to recover from the GFC)”
Meanwhile for practical tips on what to do when bad news hits the market check out our earlier article on how-to-prepare-for-a-market-downturn