What 11 market crashes can teach investors about the coronavirus crisis

Research reveals that for seven out of the 11 times in history that the S&P 500 has fallen 25% or more, investors’ losses were repaired in under two years.

Over the past 148 years, the stock market (as measured by the S&P 500 index) has tumbled 25% or more on 11 other occasions.

This number-crunching, by fund manager Schroders, offers key takeaways for investors against the backdrop of the pronounced stock market correction that has taken place over the past two months in response to the coronavirus pandemic.

The first point to note is that markets do recover from heavy stock market falls, eventually. On this front, the shortest time it took the S&P 500 index to recoup losses was nine months, in 1970. In contrast, following the Great Depression in 1929, investors needed plenty of patience, as it took 15 years for the US market to claw back its 82% decline.

Some comfort, though, can be taken from the fact that in seven of the 11 bear markets investors saw their losses repaired in less than two years. Schroders’ analysis found that on three of the other four occasions (1893, 2001 and 2008), the period to breakeven was four to five years.

A key takeaway from the data is that investors need to be patient and not make irrational decisions. Sizeable losses will have occured to many people’s Isa or self-invested personal pension over the past couple of months, but they remain paper losses and become crystallised only when the sell button is pressed. Those who have time on their side will be able to ride out the storm.

But for those approaching retirement, such losses may unfortunately never be recovered unless retirement plans are put on hold.

The reality is that volatility is part of the deal of investing in equities. Ultimately, it is the price that investors pay for the fact that over the long run, putting money into shares rather than leaving it in cash will yield greater rewards.

While it is reassuring that most of the 11 bear markets recovered losses in less than two years, this serves as a reminder of the dangers of trying to catch the proverbial falling knife. Over the past couple of weeks, global markets have, on the whole, been rising rather than falling. The danger, though, is that investors will be lulled into a false sense of security, assuming the market falls are now over and then attempting to time the market.

Veteran investor John Chatfeild-Roberts observes that bear markets throughout history have one big thing in common in that they “suck people in and then destroy their money”, as they typically have “relief rallies” in which markets post strong one-day gains, but these are followed by further sharp market falls before the bottom is reached.

Richard Pease, another highly experienced investor, who manages the CRUX European Special Situations fund, thinks that it will continue to be a “bumpy ride” for markets as investors anxiously wait to see whether the relaxation of lockdown periods in the coming months proves to be successful or otherwise.

“The concern I have is that this unpleasant virus is going to haunt us for longer than we think,” he says. “There could be a reversal of easing lockdown measures in three or four months’ time. I would like to think markets have tested the bottom, famous last words, but it will continue to be a bumpy ride.”

He adds: “Markets are assuming that mankind will win and beat this virus. Looking 18 months ahead, I would like to think that if it is not beaten completely, through a cure or vaccine, it will be manageable.”

Chris Wyllie, chief investment officer at Connor Broadley Wealth Management, agrees that markets are far from out of the woods and is wary of a short-term pullback.

He says: “On the way down, we set levels where we might buy the market. We did the same on the way up, and we are now in that zone, quite a lot sooner than we imagined. Markets may rise further from here, but as they do, we expect they will meet increasing resistance.

“Meanwhile, we think the risk/reward trade-off has become unattractive once more, not only because of the bounce in markets, but also because of the latest evidence of the longer-term damage inflicted on the economy, particularly in terms of employment. Therefore, we have reduced exposure to UK, European and US equities to take us back down to the lowest levels of overall equity exposure, which, we trust, will leave us well positioned to assess markets as they enter this next complicated phase.”