by Martin de Bruyn, CFA, CFP®
Markets are truly fascinating. This year we have witnessed a market crash and are in the midst of probably the biggest economic contraction ever, yet the South African and US stock market as examples are roughly at the same levels where they started at the beginning of this the year. Does this make sense?
Share prices follow company earnings and earnings will be decimated due to some industries operating at less than full capacity and some not being able to operate at all. We will witness mass retrenchments; a lot of hardship and more uncertainty will surely follow. So, do the market levels make any sense? Yes, it does make sense since investors look forward, estimating when profits will start to rise again. The current consensus is that we will see strong recoveries post the sudden economic stop that happened. The main reason for this view was brought about by the central banks of the world and in particular, the US fed committing to support the markets by ensuring that there is sufficient liquidity so that the markets do not freeze up. The Federal Reserve chairman Jerome Powell even went so far as saying that they will do whatever is necessary and that they will not run out of money (committed to unlimited asset purchases). Recently they even started buying corporate bonds which provided further certainty to market participants. The central banks of the world drew on lessons learned during the 2008 global financial crisis, acted very swiftly, decidedly, and committed to unprecedented levels of bond purchases to support the markets. They have also reduced interest rates to record low levels (monetary stimulus) and President Donald Trump is now pushing for a one trillion-dollar infrastructure spending plan (fiscal stimulus). A lot of debt has been created which was necessary but unfortunately, future generations will have to pay for this debt.
One lesson that stands out for me is that it is impossible to time the market as there are just too many moving parts, but we do know that markets move higher over the long-term as humanity innovates, compete and move forward. It reminds me of the statistics which show that the investor who stomachs the volatility and stays invested is a lot more likely to reach his/her goals as opposed to the investor who tries to time the market. These statistics prove that if the market timer missed just the ten best performing stock-market days over the last twenty-five to forty years, he/she would have been left with half of what the patient investor would have saved. These best days normally occur after the worst days and that makes it so much more emotionally difficult to buy to participate before the good days’ return. I am immensely proud of our clients who stayed the course and therefore participated fully in the market upswing.
