What comes down should go up again

How long will it take for the markets to recover and for ordinary investors and citizens worldwide – and in SA – to feel some solid ground under their feet again?

Perhaps the answers lie in taking a look at stock market crashes that preceded the current global turmoil – and show that all economic downturns are always followed by a recovery. 

The global economy was already in a precarious position when a Black Swan event occurred in January 2020 in the form of the coronavirus disease 2019. In financial terms a Black Swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. The impact of Covid-19 and the ramifications of the subsequent reactions by governments around the world has shaken global financial markets.

A stock market crash transpires when a broad index or many related indices experience rapid, double-digit declines. There is no specific percentage decline that exactly defines a stock market crash, but participants generally know one when they see one.

Previous market crashes

1929: Everyone knows about the infamous and prolonged Great Depression of the 1930s when people faced hunger, lost their businesses, farms, houses and faced a virtually no-hope scenario worldwide. This depression was sparked by the Wall Street crash in October 1929 when the Dow Jones Industrial lost 39.6% off an all-time high. By the end of 1932, the exchange had lost 89% of its value due to overvalued stocks, poor banking structures and low margin requirements. Altogether $14 billion of wealth was lost.

Slumped economies only started to recover after about a decade – sparked in the US by President Roosevelt’s New Deal, basically a social welfare plan to rescue hungry masses. In Russia, Stalin worked out his famous Five-Year-Plan to do the same for the Russians. In SA, the economy was hit so severely that the then Prime Minister, James Barry Munnik Hertzog, cut a deal to govern South Africa together with his opponent, Jan Smuts, just to be able to lift the plight of the people through social welfare and business development programmes. 

1987: Better known as the Dotcom Bubble, this crash that saw $2 trillion erased off markets, occurred when the Dow lost 22.6% in a single day’s trade in October 1987, 36.7% off a high the month before. This was caused by a lack of liquidity, overvalued stocks and the use of Derivative Securities Software and Program Trading and stock markets took about a year to bounce back.

2000: The crash wiped out $8 trillion of wealth and followed after a period of record growth between 1992 and 2000. It was caused by corporate corruption, overvalued stocks, and inexperienced traders using the Internet and, in some cases, research arms of investment banks issuing favourable ratings on companies that were in fact almost bankrupt.  Statistics from Capital IQ reflect that, while the JSE All Share Index (JSE ALSI) experienced a sharp rise and bear market during the 2000 market crash, it never dipped below its pre-crash level. 

2008–2009: Accountancy SA reports that on 9 October 2007, the Dow hit its pre-recession high and closed at 14 164.53. The subsequent market crash, triggered by the US subprime mortgage crisis, saw 11 separate days in which the S&P 500 dropped at least 5% in a single day. By 5 March 2009, it had dropped more than 50%. As with the 2000 crash, it took some of these global indices about four years to recover.

However, the JSE ALSI reached its pre-crash level on 4 November 2010 – only 18 months after the market low, and after a year slightly below this level, the subsequent rise above the original base took hold from the end of October 2011 –  2.5 years on from the 5 March 2010 low cited above.

Insights on market crashes

Lullu Krugel, Chief Economist PwC Strategy, and Dr Christie Viljoen, Economist PwC Strategy, shares the following insights on stock market crashes:

• Market crashes are not novel occurrences; they do happen, and so do market recoveries.
• With the current market uncertainty far from over, expect more volatility, but know that this is part of any recovery process.
• Based on our analysis, it seems that as soon as some form of a recovery takes shape, the allure of high yields draws investors with higher risk appetites to emerging markets like South Africa, contributing to a faster recovery compared to US and UK stock market indices.

Sherwin Pillay, Principal Investment Consultant, Simeka Consultants and Actuaries advises that investors should be focusing on their long-term goals. There is always the temptation to change strategies and switch out of an underperforming portfolio into cash. Remaining invested is the best thing an investor can do to meet their investment goals.

“Past market crashes have shown that the ultimate winners of any market crash are those who stick to their long-term investment goals and remain invested through the crash. Switching out investments (or changing investment strategies) often yields the most inefficient outcomes, as investors would be locking in their losses,” Pillay concludes.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.