Coronavirus and
the global market

How Coronavirus is affecting the global markets

Impact of Coronavirus on global markets

In the last few weeks global markets have been rattled by the impact of  Coronavirus Covid-19.

While big moves in the stock market are often headline news, and can be uncomfortable for investors, it’s important to consider these against a longer-term historical context.

What’s happened?

When the Coronavirus became known in China in late January, it was not anticipated to have a serious effect on the global economy. Fast forward a few weeks and things have changed dramatically.

Due to the emergence and acceleration of the virus outside of China, it has caused markets to respond as the realisation set in that the outbreak would trigger at least a short-term disruption of global economic activity. Fear has also been heightened by the latest travel restrictions and cities in lockdown.

Financial markets don’t like uncertainty and with many questions surrounding the virus remaining unanswered, global markets continue to try to price in the longer-term risks. Investors will have seen an impact similar to the performance of global markets.

What should you know about market volatility?

The impact of the Coronavirus on the stock market has been felt heavily, with the S&P 500 dropping 30% in a month (24/02 – 23/03/20). Whilst they feel bad at the time, corrections and crashes have happened throughout history and have many triggers – 1987 Black Monday, Dot com crash and the global financial crisis.

What you need to know about corrections:

  • They’re a 10-20% fall in the stock market
  • They happen on average every year or two
  • The average fall is 13.7% and lasts for four months on average
  • Recoveries (back to levels before the correction) have taken four months on average

What you need to know about a crash:

  • They’re a stock market fall of more than 20%
  • They happen on average once every four years
  • The average fall is 32.5% and last for 14.5 months on average
  • Recoveries (back to levels before the crash) have taken two years on average

Source: CNBC

There have been 26 market corrections since World War 2 (as of February 27, 2020). However, the average return in the 12 months following these losses was more than 16%.

Don’t forget 80% of corrections so far have not turned into crashes. And while past performance is not a reliable guide to future performance, so far 100% of crashes have been followed by a recovery that more than recovers the fall.

What should you do about it?

While it is tempting to take action in a downturn, often the smartest decision you can make is to continue as you were.

Remember the investing principles of Warren Buffet, arguably the world’s most successful investor: it’s time in the market, not timing the market that is the key to success.

If you are tempted to move your money into cash/deposit you need to be aware of the following:

  • This is not risk free and inflation could erode the value of your money
  • It will be difficult to tell when the right time to re-invest is
  • The bottom of the market will only be known in hindsight
  • Re-invest too early and you may be exposed to a further reduction in value
  • Re-invest too late and you may have missed out on sharp recovery growth

What next?

Over the last 20 years (end 1999 – end of 2019), the FTSE All-World GDP has averaged an annual return of 7.5%, and this includes the crash of 2008. So, tune out of the short-term market fluctuations and noise of the headlines as much as you can. Know your time horizon and focus on your long-term investing goals.

Bull & Bear Markets

Below is a graphic of the Bull and Bear markets history since 1900.

Notes: Calculations are based on FTSE All Share (GBP Total Return).

A bear market is defined as a price decrease of more than 20%. A bull market is defined as a price increase of more than 20%. The plotted areas depict the losses/gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index. Time period: 31 January 1900 to 31 December 2018. Calculations based on monthly data. Logarithmic scale on y axis.

Source: Global Financial Data.

Past performance is not a reliable indicator of future results. The value of investments, and the income from them may fall or rise and investors may get back less than they invested.

Issued by Vanguard Asset Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority. © Vanguard Asset Management, Limited. All rights reserved.

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