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What goes up must come down?

Posted: 23/06/22

By David Cresswell, Head of Advice at David James Wealth

When will this all end? How much worse is this going to get? Should I pull out of the market and go to cash?

All of these are very valid questions that I have been asked over the last couple of months and it’s perfectly understandable to be concerned when we see the value of our investment portfolios falling rapidly. However, as I said in my message a few weeks back, we know that markets won’t always move in an upwards direction and it’s important to remember that you have a plan which is set to work over the medium term, and which considers short-term market volatility.

It occurs to me that our most recent experience of significant falls in global investment markets may have led us to believe that these things pass very quickly indeed. When the Covid pandemic first hit, in February 2020, global markets fell by over 25% in under a month, but quickly started the climb back up again and were level with the previous market high within six months (see chart below). As we know, technology stocks such as Amazon, Apple, Netflix and Zoom soon sent global markets to new highs.

Covid Crisis of 2020

The Covid pandemic is perhaps not the best proxy for considering the current situation, given that it was prompted by a total lack of knowledge of what the impact of a global pandemic leading to near-universal lockdown and thus worries of the global economy grinding to a halt, rather than concerns about oil prices and global inflation generally. A better recent example might be the Global Financial Crisis of 2008-2009 when there was genuine concern that the international banking system was about to collapse, and we might not be able to access our cash. As you can see from the chart below, the fall from market high to market bottom was closer to 40% but took nearly five months. Even so, markets reached the former high within a year, before falling back a little and then rising above the previous high around seven months later and two years after the start of the crisis.

Financial Crisis of 2008-2009

The Oil Crisis of the 1970s

Some people are pointing towards the 1970s as a better example of the last time soaring oil prices lead to runaway inflation. The MSCI fell from a high of 131.48 on 30 March 1973 to a low of 74.45 on 30 September 1974, so a full eighteen months from top to bottom. It then took five years to grow back to the previous high level*. Putting this into context, the price of oil went from an average of $4.08 per barrel in 1973 to $12.52 in 1974 which is a rise of 206%. If the same were to happen today, this would mean the price rising from the 2021 average of $65.85 a barrel to $202.81 a barrel. It’s currently sitting at a day’s range of $106.82 - $120.46** which is 72.57% higher than 2021’s average.

Tin Hat Time

No-one knows what will happen, but it does seem to be the case that markets move much faster now than they did in the 1970s. This is mainly due to all trading being online, rather than requiring a load of men in bright blazers shouting at each other on the floor of a stock exchange. Many of these online trades are placed by computers based on algorithms with little or no human intervention. We cannot know that markets will definitely rise within the next couple of years, but neither can we know that they won’t. What we do know is that markets rise and fall and rise again over the medium to long term and, so long as you have a plan and enough time to execute that plan, all these fluctuations in market values will eventually work in your favour. After all, if you remain calmly invested whilst those around you are panicking and losing their shirts, your investment managers will be presented with many excellent investment opportunities at very favourable prices. It happened in the 1970s, it happened in the 1980s, it happened in the 1990s, the noughties, the 2010s and it will probably happen again in the future.

If you had held your money in cash from the beginning of the global financial crisis in 2007 and held it in cash until today, your money would have lost 36.61% of its value against the Consumer Price Index. In simple terms, £1,000 held in cash would be worth £633.90 in today’s terms. If, on the other hand, you had invested it in the MSCI World on the day before the Global Financial Crisis started and stayed invested until today, your £1,000 would be worth £2,591.90 today, even after the recent market falls (see chart below).

Start of Financial Crisis to Today

Times like these are never pleasant. Those investors with a plan are the most likely to come out in the right place.

- When will this all end? – no one knows
- How much worse is this going to get? – no one knows
- Should I pull out of the market and go to cash? – so long as you have a plan, your objectives have not changed and you have funds on deposit to cover emergencies, it’s generally best to stick to your plan. As always, personal circumstances will differ, and you should consult your adviser before making any decisions.

David James Wealth - Financial Planning with Purpose.

* https://www.longtermtrends.net/msci-usa-vs-the-world/
**https://www.oilcrudeprice.com/wti-oil-price/ 20 June 2022

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