Knowledge Centre

Many investors remain somewhat rattled by last year’s dramatic selloff due to the COVID-19 pandemic. It certainly was enough to jar even the most seasoned investors who feared that a long term, broad market decline might be unfolding. The reality is that big falls are poor indicators of subsequent recessions. In almost all the big market falls since 1951, rapid stock market declines came in the midst of an economic recovery and in most cases economic growth continued with the notable exception of the market collapse and recession following October 2008. Investors need not worry about whether a fall in the former predicts the likely outcome of the latter.

During the last portion of a bear market most investors become risk averse, believing worse news is yet to come. They minimize or eliminate their equity exposure and move to the safety of cash and bonds. Eventually stock markets bottom and turn higher as improving economic news, such as increasing corporate profits, cause risk avoiders to eventually become risk takers.

Risk takers are generally those who seek to benefit from a growing economy. Risk avoiders, conversely are not willing to depend upon a growing economy for their well being. The problem for the risk avoider is the temptation to become a risk taker following a long period of success as they may expect improving economic conditions will continue.

Unfortunately, many risk avoiders will miss an entire stock bull market because of the ongoing noise of natural disasters, wars, asset bubbles, financial scandals, failing countries, currency wars and social unrest around the world. In reality life is about taking on risk, be it driving a car, snowboarding, getting married, having kids, owning a home, changing jobs or simply flying to a holiday destination. The only way to obtain meaningful reward is to take on some level of risk.

When equity markets fall, it is inevitable that comparisons to other market collapses in history are made. After a tremendous one year rally that saw markets climb more than 40% from March 2020, any correction would not be unexpected. It was the magnitude and velocity of the drop that has sent some of the heartiest bulls to the sidelines. The problems in Europe and the U.S. remain threats to the global economic recovery and could push stocks lower in the months ahead; however, markets are generally in better shape to withstand another recession. The accompanying chart and data shows that the current rally has exceeded the historic average of the previous eleven rallies since 1968. The run up is above the average long term average gain.

The news of the downturn in the global economy has many investors wondering how they will be affected. Looking forward, it is important to avoid overreacting. Now is not the time to panic or make financial decisions based on emotions. Think about your time horizon and if you have a longer perspective, then stay the course with your portfolio. Finally, know where you stand financially as knowledge can be an important source of reassurance. Market uncertainty tests the resolve of even the most hardened investor, no matter their risk tolerance or time horizon. The current degree of market volatility naturally leads to concerns but it is important to maintain a balanced perspective as it can help investors remain focused during these difficult times.

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This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results. While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.