It was only just over a month ago that share markets globally were in free fall as the full extent of the disruption that the pandemic had caused was being realised. Most share markets saw their biggest monthly declines ever as risk and new information was being processed.
Looking back, on the 23rd of March, the news flow was terrible, New Zealand moved into level 3 and were going to level 4 in two days’ time. Globally things were starting to spiral out of control as the virus spread through Europe and the US. Unemployment was rising globally, production grinding to a holt, borders being closed, businesses started to fail and it seemed things could not get any worse.
But since that date, the share market has railed, with the US recording their best monthly rise in nearly 40 years and Australia their best monthly gain ever plus similar results in other markets including NZ. So why in the world would shares rally in the face of the worst economic data we’re likely to see in our lifetimes?
The simplest reason is the share market can be one of the most confusing places on earth. There have been plenty of times in the past when the share market is seemingly out of step with the broader economy. The share market showed strong gains through both World War I and World War II, possibly the most uncertain of times in the past few hundred years.
Earnings growth has been negative 30 times since 1930. In 23 of those years, the US share market was up. Earning growth decelerated by double digits 16 of those 30 years. Of those 16 years, 11 of them were up years in the share market. And the S&P 500 rose by double digits 8 times during a year when earnings growth was down double digits.
This table shows a number of years where economic growth didn’t match up with the performance of the share market. We like to use US data, as a large portion of the funds Optima Wealth invests into is the US and they have the longest dated and most reliable data set.
The reason this happens is fairly simple — economic data is backward-looking and the share market is forward-looking. That’s easy enough to understand but the current situation still doesn’t quite feel right. The strange thing about this period is we know for a fact the economic data is going to look awful.
Six to seven weeks ago, when most of the stay-at-home orders went into effect, you didn’t have to be a genius to realize the terrible impact this would have on the economy. This was the easiest recession to predict in history. In past crises, you could look to certain data points for clues in the economy to guess what was coming but never something like this that was so telegraphed. Maybe I’m giving the collective wisdom of the crowd too much credit here but the share market fell 35% in 4-5 weeks in February and March. This was the fastest re-pricing in history.
You could argue that re-pricing should have been (or will be) worse but this was a massive drop in shares unlike we’ve ever seen before in terms of how swift it was. Now we’ve seen a massive bounce after all of that expected bad news came to fruition.
The share market is often a confusing place and we live in confusing times. Here are some other confusing scenarios that wouldn’t surprise me as we navigate this crisis:
- We could see shares fall when a vaccine finally hits the market in the ultimate sell the news moment.
- We could see the highest quality shares lag the junkiest shares during the depths of this crisis.
- We could see new all-time highs in the share market even as the economy is experiencing the worst of the crisis.
- We could start seeing good news on the virus front that the share market sells off on because it potentially means less fiscal and monetary stimulus.
- We could see shares gives everyone a giant head-fake and then go down even further than they did in March.
- We could also see shares trade in a volatile range that doesn’t see all-time highs but doesn’t re-test the lows either.
- We could see shares rise on bad news that’s not as bad as expected or fall on good news that’s not as good as expected.
Nothing would surprise me because this crisis is so unique. The under- and over-reactions are bound to be even more forceful than usual. And maybe that’s the point. Everyone has an idea about how this crisis will or should unfold from here. Investors make plans about what’s going to happen and the share market laughs.
So whilst investment portfolios are still well off their highs of a few months ago recovering about, on average, half of their paper losses, the worst thing you could do in an investing environment like this is assuming there is only a singular path forward. The second worst thing you could do is assume you know exactly what that path is. The market is likely to continue confounding investors of all shapes and sizes so it’s best to keep an open mind from here.
It is because of these unknowns (as their always is with investing) having a sound, sensible evidenced based financial plan is even more crucial. By being goal focused, flexible and working with a holistic financial planner that will help you navigate through times like these to keep you on target to get you to where you want to go financially.
When I can finally can get out and about, I can/will help you have a deeper understanding of how the past few months have affected your goals and objectives . For new investors, I will look to implement a resilient new holistic financial plan with you. But when it comes to where the share market goes next, we have to be honest and say “ I have no clue what’s going to happen next and I don’t plan on guessing”.
In saying this, when it comes to investing, when you are in it for the long term, today is always the best day to start. See my article on “Is it a good time to invest”.
Here is another article of interest about honesty in the markets.
Back to Insights