March meltdown – How bad was it?

March was a very difficult month for investors, their advisers and fund managers and everyone is glad April is proving to be much better for global stock markets with a strong bounce in returns. However with the FTSE 100 trading at 5,773 as I write, the index of the UK’s largest companies is still well below its January peak of 7,675 on 17/1/20 exactly three months ago. That is a decline of almost 25%. It should be noted however that FTSE 100 index is not necessarily a good proxy for assessing global equities, the UK economy* nor the multi-asset portfolio that you may have. This is due to the index’s high weighting in oil majors, miners and banks, highly cyclical and economically sensitive sectors. In contrast the much broader MSCI World Index** priced in US dollars was down 18.7% over the same period.

There has been plenty of comment and discussion as to how bad this crash has been and when you hear comparisons with the 1929 Wall Street Crash, the Great Depression that followed in the 1930s and economic statistics worse than the global financial crisis of 2007 – 2009 we know this is serious. So how does the current bear market compare with earlier major crashes? An answer lies in the interesting and highly readable blog post written by Nick Maguilli:

Nick’s blog “Of Dollar and Data,” focuses on personal finance with an emphasis on data analysis. In his article on 1/4/20 he argued March was the craziest month in stock market history. He was writing about the US stock market here. By craziest he didn’t mean it was the worst performing month. Let me explain his thinking . The worst month was in September 1931 when the Dow Jones lost 30.7%. March 2020’s fall of 13.7% ranks only 16th worst since 1915. Maguilli defines his term craziest in reference to the  cumulative absolute percentage change. For example if the market falls 3% on day one, gains 2% on day two and falls 4% on day three the cumulative absolute percentage change is 9% over those three days. The total change in March was 117% and with just 22 trading days that is an average daily movement of 5.3%! The next highest average absolute daily change was 3.8% in October 2008 at the height of the global banking crisis. March 2020 also recorded the highest VIX ever. The VIX or so called fear index is a widely cited measure of volatility, although it only started in 1993. I am pretty sure the same phenomena could be observed in UK and other global markets.

The question now of course is what about the future? The current or pending economic recession or depression (the jury is out as to what will be the most accurate description) is unique in that the cause has been a pandemic rather than a financial collapse caused by systemic risk and excessive debt in the banking system as in 2007-2009 or from inflated asset prices as in 1929 and the early noughties when the technology bubble burst. Moreover it is unusual that the global response has been to shut down the economy. In all other recessions logically you want the public to go out and spend and support businesses. We are in uncharted waters and it is unclear whether the easing of the lockdown and the gradual re-opening of the economy will merely lead to another spike in the Coronavirus, at least until a vaccine is found. That could take 12-18 months. In the meantime businesses will fail, unemployment will spike, the economy will contract and company earnings and dividends will be slashed. Stock markets won’t therefore react well and that is bad for investors. Various commentators I have listened two warned about the false signal stock market bounces may give. They are not uncommon in bear markets whilst the bottom may not be reached until investors capitulate and just sell out of desperation. We have not reached that point yet so we could see a reversal of the April gains.

So what’s the good news. The seemingly unlimited monetary and fiscal stimuli from central banks and government has been unprecedented and should help to support the global economy and limit the long term damage. The teeth of the bear may prove to be no match for the big bazooka. The other point to note is that bear markets tend to be relatively short compared to bull markets, typically 12-18 months. The equity bull market that has just ended lasted for 11 years. Of course this bear market may be different if the economic slump is deep and prolonged as in the 1930s or in the 1990s in Japan. I can’t honestly conclude we have seen the worst yet although that is not a reason to sell. Hold tight.

*The FTSE 250 is composed of companies that are more reflective of the UK domestic economy than the FTSE 100 index. Around 70% of the earnings from FTSE 100 companies are derived from outside the UK.

** The MSCI World Index is an index of 1,643 large and medium sized companies across 23 developed markets. It is frequently used as a benchmark for global equities.

The content of this blog are my own views.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice for example to buy any of the stocks highlighted. You should seek individual advice based on your own financial circumstances before making investment decisions. Thanks to Nick Maguilli who gave permission to quote from his blog.