Is insecurity the new normal for investors?

Two years since the start of the Covid-19 market sell-off, interactive investor explores how investors can navigate markets which have gone into ‘anxiety mode’.

This time two years ago, global markets started their slide into the biggest sell-off since the 2008 global financial crisis, as the seriousness of the Covid-19 pandemic became more apparent each day.

Richard Hunter, Head of Markets, interactive investor, points out that: “Although the real carnage hit markets in March, the slide began just before, with three separate 3% slides in the last week of February. By the end of the first quarter in 2020, the FTSE100 had lost 25% and the flagship S&P 500 20% for the year.”

In the two, very claustrophobic, years following the start of the 2020 sell-off, the global market pressure cooker has continued to build up – now, with new geopolitical threats sparking fear from investors.

ii’s market commentators look back on the past two years, while also looking at the current geopolitical tensions.

Becky O’Connor, Head of Pensions and Savings, interactive investor, believes that the events of the past two years are a reminder to try to keep emotion out of investing: “I think one of the lessons from the last two years is that second-guessing markets is impossible. We’ve learned to expect the unexpected – in a topsy-turvy world – and it is almost more sensible to assume that whatever you expect is probably what’s not going to happen.

“Change feels like the only constant, and insecurity is the new normal. We’ve collectively experienced global trauma after the emotional roller coaster of the past two years. Learning to separate personal responses from investment decisions is more important than ever and could help preserve your wealth as well as your broader well-being. This is precisely why we launched our Mind & Money podcast – to help investors gain perspective on their own personal and emotional feelings about global turmoil.”

With the last of Covid-19 restrictions set to be lifted (for now at least), interactive investor, the UK’s second-largest DIY investment platform and number one flat fee provider, looks back at how markets have behaved since the 2020 sell-off, and assesses how investors can avoid getting burned as the global stock market pressure cooker shifts into another roiling boil.

Covid-19 and anxious markets

Within the context of ongoing globalisation, the outbreak of Covid-19 could not be seen as an isolated threat, but rather, a virus with the potential to spread across the world rapidly - prompting a global health crisis.

Victoria Scholar, Head of Investment, interactive investor, says: “Naturally, this spooked markets, and as many of us packed up our desks to begin a new chapter in our working lives, markets went into anxiety mode.

“With hospitals beginning to fill up, and businesses forced to close, the Dow Jones lost nearly 40% of its value from peak to trough from February 2020-March 2020, amid panic selling.”

How did markets begin to recover?

Victoria Scholar, Head of Investment, Interactive Investor, says: “After the initial plummet, investors sensed an opportunity to buy the oversold market, which catalysed a record-breaking rebound in the US, with losses fully recovered by August - much quicker than the usual two to three-year timeline.

“By contrast, the UK’s recovery was much slower - with the FTSE 100 only testing its pre-Covid peak this year, in 2022.”

Keith Bowman, Senior Analyst, interactive investor, adds: “Ultra-low interest rates since the outbreak of the Covid crisis have helped perceived growth arenas such as tech stocks outperform.

“The Nasdaq 100 is up by 48% since 20 February 2020 compared to a gain of 17.5% for the Dow Jones industrial 30.”

A reminder: it is time in the market that counts, not timing in the market

Richard Hunter, Head of Markets, interactive investor, explains: “Another example of the old market adage that “it’s time in the market that counts, not timing the market,” is that investors would have again been rewarded for patience rather than panic.

“Since the end of the first quarter in 2020, the FTSE 100 has rallied by 33% (and the S&P 500 by 68%) despite the subsequent turmoil of economic restrictions and, of late, geopolitical tensions.”

Looking ahead: will the stock market pressure cooker boil over?

Markets took another tumble recently over concerns that Russia was about to invade Ukraine. Travel stocks slumped, and oil prices surged. And even though rumours of de-escalation provided markets with some solace, we are still far from any certainty over how this situation will resolve. The lingering threat of military action, combined with higher interest rates and inflationary pressures, continues to add more and more pressure to the pot.

Victoria Scholar, Head of Investment, interactive investor, says: “The imminent threat of Covid is finally receding to the rear-view mirror. However, there are newer threats which are already prompting markets to revert back to a similar anxiety mode which we saw in 2020. Ongoing inflationary pressures in recent weeks, as well as geopolitical tensions, have proved challenging for investors to navigate.”

Keith Bowman, Senior Analyst at Interactive Investor, explains: “The current tensions between the West, and China and Russia have seen indices there significantly underperforming. For example, the Hang Seng and the Russian Trading index are both down by around 11%.”

Victoria Scholar, Head of Investment, Interactive Investor, adds: “Volatility appears to be the only certainty ahead, and so it is likely many investors are looking at their portfolios and assessing what their next move should be.”

“Rather than sticking to the sidelines, investors should prepare to be more selective with their stock picking in 2022 – as market headwinds continue to separate the winners from the losers.”