fear the Bear?
With the FTSE 100 officially moving into ‘bear’ territory yesterday, Richard Stone, Chief Executive of The Share Centre, comments on what this means for investors.
Bears are fearsome creatures and bear markets are a concern for investors. The fall of the FTSE 100 to more than 20% below its last peak means that it is formally a bear market and this drop in share prices will represent significant losses on paper for many investors. Because of its over emphasis on commodity stocks (oil, gas and mining) the FTSE 100 has been more severely affected than some other markets. The FTSE All Share has (only) fallen 19% from peak to today – so is not quite officially in bear market territory yet…
The cause of this bear market has been well publicised – namely concerns over the slowdown in China and the global economy more generally. Evidence that the falling oil price is as much a function of weak demand as it is of over supply. Increased tension in the Middle East between Iran and Saudi Arabia does not help, particularly against a backdrop of other political uncertainty whether around Brexit or the US presidential election.
If the global economy is faltering after a long, slow seven years of anaemic recovery from the 2008 financial crash, a concern is that policy makers have few instruments left at their disposal. Markets are already awash with cash – indeed that is arguably what drove asset prices higher in the first place. Interest rates are already close to zero and tax rates cannot be cut as states are still up to their eyeballs in debt (the UK has yet to eliminate its annual deficit).
All eyes are on how China will seek to ensure a soft landing or reinvigorate its economy. Headline data is viewed sceptically and data around the manufacturing sector or electricity consumption suggests the economy may be slowing more rapidly than the official data is indicating. The Chinese authorities have cut interest rates and modestly devalued. A more substantial devaluation may yet come – this would shock international markets and could result in further sharp stock market falls. It would make Chinese exports cheaper – effectively exporting deflation to the rest of the world and the west in particular. Conversely western exports to China would be more expensive and hence markets in those countries that have significant export trade to China would be impacted. Investors should keep a close eye on how the Chinese authorities react – they need to maintain growth to maintain social stability and support the ongoing urbanisation of the population, so doing nothing is not really an option.
However, when encountering a bear the well-known advice is ‘do not run’. Whilst concerns will persist for some time yet, I believe the same applies for investors when faced with a bear market.
Looking at this downturn in the context of other bear markets (when the FTSE All Share has fallen by at least 20% from its previous peak) since 1970 is illuminating:
This would be the first bear market since the financial crisis in 2007-9.
The 7th bear market since 1970. (1973-4, 1987, 1990, 1998, 2000-03, 2007-09)
The average fall in those six previous bear markets is 36% - indeed, four of the previous six bear markets have seen falls of at least 30% from the peak. This would suggest there may be further for the market to fall yet.
The average duration of the previous bear markets has been just over 12 months. The FTSE All Share hit its peak of back in April 2015 – suggesting there may be a few months of falling prices yet to go.
So, based on history we may not have seen the end of this bear market fall just yet, although the worst may be over.
More encouraging is the historical lesson of what happens in the recovery. The upturns following each of the previous six bear markets have lasted on average nearly three years (35 months). The average growth in those upturns has been 90%.
This is borne out by the most recent example – in 2007-9 the market fell with the FTSE All Share falling to 1789. Today, even after the latest falls, the market stands at just over 3,100 – an increase of 73% over the last seven years or c.10% per annum excluding income even after the recent falls.