With markets showing increased bouts of volatility and entering bear market territory recently, many investors will be wondering where and when this will end. With talk of recession and sharp increases to interest rates, there is a possibility there is more of a drawdown to come.
However, as David Henry, investment manager at Quilter Cheviot, points out below, this is not new ground and markets have shown in the past to recover quickly after entering a bear market, producing good returns over the long-term despite the short-term pain.
For Henry, investors need to stick to the plan and look to the long-term as that is where the returns can be made.
David Henry, investment manager at Quilter Cheviot:
“As of the beginning of last week, we’ve just entered our eleventh “bear market” (in dollar terms) for global stocks since 1970, defined as a 20% decline from peak levels.
“A weakening pound has helped insulate domestic UK investors from the worst of these drawdowns, but the above gives a decent barometer of global investor sentiment. In short, it is not great.
“So – now that we have breached this historically important level, what now? Well as you can see from the above, in most past bear markets the picture got worse in the short-term as sell offs deepened – but if we look at one-, three- and five-year returns for global stock markets (MSCI World) post breaching the 20% drawdown level, the picture is encouraging.
% 1-year return
% 3-year return
% 5-year return
“After entering official bear market territory, you have historically had a 60% chance of a positive return over twelve months, a 66% chance of a positive return over three years, and on all previous occasions global stocks have entered a bear market since 1970, they have posted positive returns over the following five-year period.
“Clearly, there is a lot going on in the market just now that would suggest the pain may be more prolonged than we would hope and they are not something to take lightly. That said I would simply point out that during all of the aforementioned bear markets stocks were down for good reasons too, and every single time they recovered. Sometimes quickly, always eventually.
“Take the most recent bear market as an example and you can see all the negative headlines investors had to deal with over the course of 2020:
- The impeachment of a sitting President for only the fourth time in history;
- Severe escalations in tensions between the US and Iran;
- Natural disasters including, but not limited to, historic bushfires in Australia;
- The Prime Minister falling seriously ill;
- Continued trade dispute between the US and China;
- An acrimonious Presidential race, and a disputed election result;
- Deadlock regarding the UK’s future relationship with Europe post Brexit;
- Negative oil prices;
- The worst economic data since the Great Depression; and
- The Coronavirus.
“Yet global stock market indices ended 2020 in the green.
“We won’t need “good news” for the stock market to bottom. It will only happen when investor pessimism about the future has peaked. Working out when this will occur is impossible, one of Donald Rumsfeld’s “known unknowns”. All investors can do in the meantime is stick to the plan.”