March 2020 will be remembered as one of the most brutal months that global equity markets have ever seen. The sell-off around the world was rapid and extreme.
“The JSE fell over 35% between January 18 and March 19, it’s low point so far in this episode,” points out Adrian Clayton, chief investment officer at Northstar Asset Management.
The swiftness of that decline is unprecedented. The FTSE/JSE All Share Index had started the year at around the 57 000 level, and fell so dramatically that at one point it was trading below 38 000 points.
The S&P 500 suffered similar extremes. From a closing high of 3 386 on February 20, it closed at a low of 2 237 on March 23. That was a drop of 34% in a month.
This included two of the S&P 500’s worst six days ever, which took place in the space of a week.
The index fell 9.51% on March 12, and a further 11.98% on March 16. Both of these were bigger drops than the market experienced on any day during the 2008 financial crisis.
It was also the first time that two such dramatic declines had taken place so close together since the Great Depression of 1929.
Getting back up
Since that low point, however, the S&P 500 has now experienced five positive days in the last seven. This includes the 9.38% climb on March 24, which is the ninth largest daily gain the index has ever posted.
It is still down 20.0% for the year to date, but over the past 12 months, it has only lost 8.0%.
The JSE has staged a recovery too. Since March 20, it has delivered gains in seven of the past nine days.
It is currently down 22.5% for the year to date, which means it has regained around a third of what it lost.
For investors, it may be tempting to look at these numbers and conclude that the worst is behind us – that the market has already bottomed. It is, however, important to maintain perspective.
Over the first hurdle
“I think the worst of this phase is over,” says Izak Odendaal, investment strategist at Old Mutual Multi Managers. “By this phase I mean the shock of the realisation that we are all going to be locked down for weeks, maybe months, that people will be without income.”
A big part of this shock was a ‘scramble for cash’, as investors were willing to sell just about anything they could to ensure they had some cash on hand.
“You saw people liquidating even safe US Treasuries just because of that scramble for cash,” Odendaal points out.
“But that phase is probably over because central banks have intervened heavily. The US Federal Reserve has pumped unlimited amounts of funds into the market.”
The steps taken by central banks and more recently governments announcing fiscal stimulus packages has provided obvious support.
“That very acute phase of this crisis is probably behind us and we now know that policy makers are serious about tackling this,” says Odendaal.
Long way to go
However, it may be premature to believe that markets are all set for a recovery. Six of the world’s 10 largest economies are now in some form of lockdown. The US has just extended its ‘social distancing guidelines’ until the end of April.
There is therefore still a lot of bad news to come.
“The next difficult phase for markets is going to be coming to grips with the actual economic reality,” Odendaal points out. “That is going to be around what company earnings are going to do, and what will happen to growth. That is still tremendously uncertain at this stage.”
The one positive for investors is that everyone already knows that the numbers are going to be terrible. Just a few days ago, JP Morgan revised its forecasts for the US economy; it is now expecting a 10% decline in GDP in the first quarter of 2020 and a 25% drop in the second quarter.
Realistically, this is about what markets are pricing in.
And it means that even if the news is even slightly less terrible, markets will react positively. However, there are still real risks that it could be worse.
“We saw that the Chinese PMI (purchasing managers’ index) was better than expected, which helped market sentiment,” says Odendaal. “But one swallow doesn’t make a summer. People want to see more convincing data and more data points before concluding that the worst is really over.”
Investors should therefore remain cautious.
“We do not believe anyone is equipped to answer whether we have seen the lows, since Covid-19 is unprecedented and its outcomes are too,” says Clayton. “Nobody has lived through a global virus and has any idea of how long shutdowns will take or whether second-round infections will occur. Our base case assumption is that they probably will.”
However, these short term uncertainties are offering some meaningful long term opportunities.
“We believe investors will make money off these levels over a reasonable time period – that is years,” Clayton says.
“We believe that markets drop and do not normally go straight back up without shudders,” he adds. “Covid-19 is likely to have duration and there will be volatility. The gains have already been steep, but we would be unsurprised to see further opportunities to add to risk assets at lower prices than we are currently trading at.”