History says: 'don't panic, wait this crash out'

Published on Switzer.com.au 17th March 2020.

Market crashes like the current one will always resuscitate long lost friends and one guy I haven’t seen for 40 years asked if he should stay in his super fund? I told him I can’t give advice but his fund was one of the best. And these funds did surprisingly well during the GFC crash. I would’ve liked to show him this chart but being on the phone did not make it easy.

It’s going to be another bad day for stocks with the Dow down 12.93% overnight, and that’s despite a 30% fall in our stock market as number crunchers who try to calculate the value of companies guess what the Coronavirus closures mean for earnings.

Median Super Funds Returns since inception

This shows that super funds have only had three negative years since they started in 1992, and the two biggies were connected to the GFC.

However, note how small the falls were — 7% and then 12% — and then they quickly rebounded into positive territory.

The table below shows why you should stick with super.

Most people in super are in balanced funds and you can see over 10 years the average return has been 7.4% and over 15, which factors in the GFC, the return drops to 6.3%.

If you were a gutsy performer your average growth is 9.7% over 10 years, but 7.8% over 15 years.

This tells you that those feeling the pain most now, and over the next year or so, will be the all-growth super investors but see how the average return still bounces back.

Stock markets are a window on the economy but it’s not a clean window and right now we’re not sure if it’s showing us an accurate picture. The lack of accurate clarity creates unreliable vision and stock markets could be overreacting because they don’t know exactly what’s going on.

When in doubt some people sell and go to cash, but the charts I’ve shown you suggests it’s better to sit and wait it out, unless you are a gifted timer of markets. If you get out and you miss the rebound of the stock market you could lose on the way down and on the way up.

Fidelity looked at a 38-year period for the stock market and it showed missing the five best days when you’re not fully invested “…drops your overall return by 35%!” 

One of the big reasons why the stock market has collapsed is because global governments have chosen serious containment of the Coronavirus, which has made it highly likely that a recession is on the way.

Most economists and fund managers were not expecting a 2020 recession but they also didn’t expect a Coronavirus either!

So is a recession a certainty? It’s possible that another stimulus package could help us avoid it but the fact that so many businesses will lose sales and profits for probably a month makes a recession highly likely.

Economist, Torsten Slok in the US-based Deutsche Bank Securities looked to history to work out if any future recession would be a long or a short one.

He said the recession linked to the 1918 Spanish flu lasted only seven months, which is much shorter than the average US recession of a year.

Torsten points out that the GFC had a housing sector imbalance, 2000 it was a crazy IT sector but he thinks the US has copped the Coronavirus with less evidence of imbalances.

This could suggest this might be a short one, especially if these containment/closure actions lead to a quicker reduction in infections and death.

On my segment on 6PR yesterday a listener made the point that we’ve been through epidemics before but he’s never virtually had to close his business.

This is true for some businesses and I know a café who has seen a 15% fall in its Sydney CBD trade and it could get worse over the next two weeks but if normalcy comes back after that, then the overall negative impact now should dissipate over time.

Torsten says, all going well, this could be a deep but short disruption, like the stock market’s deep dive, but if it’s short the share price rebound could be steep in the direction we prefer.

The key data that markets are watching are infection and death rates in Italy, Europe and the USA. If the virus numbers start telling a better story, the stock market will surge up.

Meanwhile rate cuts and the stimulus packages around the world will help. A case in the point is the Morrison Government’s support for small business.

There is a $6.7 billion to boost cash flow for employers by up to $25,000 with a minimum payment of $2,000 for eligible small and medium-sized businesses. So if a business has a turnover less than $50 million and pays wages between 1 January this year and June 30, the wages paid will be tax-free up to $25,000.

It means up to $25,000 that might have gone to the ATO in taxes linked to wages will be returned as a credit so the employer can keep staff. If the tax on wages over that time was $10,000, then that business keeps $10,000 and so on.

This is huge and underlines how government actions to offset the negatives of the Coronavirus hit to the economy could power an eventual rebound in stock prices when the infection threats in the US, Europe and here, start to fall.

Markets are coping with the uncertainty of closures and changed business arrangements and the unknown is not great for stock markets.

If you are worried, go back to chart above and see that super funds and financial advisers design their portfolios to return around 6-7% over the long-term. This is not the time to think short-term and it’s my job to remind you.

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