This is one of the most revealing stock market charts I’ve ever seen. It shows just how rough the ride is when you invest in equities – in this case the FTSE All-Share index:

Source: J.P. Morgan Guide to the Markets UK, 31 March 2020, p.92 (updated quarterly). ¹

Most investing books show only calendar-year returns when they explain how risky the stock market is. You can see these calendar year returns for the All-Share represented by the grey bars in the graph.

They go up and down like a lift operated by Mad Max. But even these violent mood swings are mild in comparison to the worst drawdowns ² contained within each year, picked out in red dots.

Those plunges really will make your stomach drop.

Market mania

What do 34 years of stock market swings and roundabouts tell us?

Firstly the -36% fall we saw through March 2020 is historically horrendous.

It’s beaten on the chart only by the -37% Black Monday Crash of 1987 and the -43% delivered during the Global Financial Crisis in 2008.

The main lesson though is that double-digit losses are a regular event, bedevilling investors in UK equities in more than 75% of the years covered.

On top of that:

• A market correction (-10% to -19%) hit home more years than not (18 out of 34 years).

• We entered bear market territory (-20% or worse) in nearly 25% of all years (eight out of 34 years).

• Peak-to-trough losses were -30% or greater in five out of 34 years (that’s 15% of all years).

JP Morgan calculates the average intra-year drop is -15%. That shows 100% equities is no place for the nervous and attentive, even though the market ended up higher in a given year some 70% of the time.

Happily the years that saw double-digit declines still ended up in positive territory 44% of the time (15 out of 34 years), too.

Down but not out

Even truly terrible drawdowns can reverse quickly. 1987’s -37% decline transformed into a 4% gain by New Year’s Eve.

I can’t see that happening this year, and it didn’t happen during any of the other 30%+ down years either, but who knows?

Many other big losses rebounded into big gains:

• 2009’s 23% down snapped back to 25% up.
• 1999 dived 11% but rose 21%.
• 1989 dropped 14% but climbed up 30%.

For new investors, this chart provides a more realistic picture of what you’re up against than you’ll get by just looking at the end-of-year tally. Equities are a much tougher place to be than I realised when I began investing, when seen through the lens of intra-year declines.

For example, the most brutal calendar year for UK equities was an off-the-charts -58% delivered in 1974. ³

Yet even that pales against the sickening -73% inflicted by the UK bear market of May 1972 to December 1974. ⁴

Forewarned is forearmed

Why am I heaping this misery on you when we’ve possibly only just binged on the first few episodes of an all-time equity horror show?

Partly because the graphic shows some good news. Things can – and often do – turn around more quickly than we think.

But also to be honest about the bad news. The stock market is a wilder place than many give it credit for.

Chalk it up as yet another reason to invest passively, to be diversified, and to only check your portfolio infrequently, lest you’re frightened out of it…

Take it steady,

The Accumulator

1. Nominal returns, dividends not included.[↩]
2. Drawdowns are the decline in the price of an investment between its high and its low over a given period.[↩]
3. Barclays Equity Gilt Study, real return including dividends.[↩]
4. Sarasin Compendium Of Investment 2020, p.167.[↩]

What caught my eye this week.

Remember a thousand years ago – or more precisely, in March – when we watched with horror news stories of Italian hospitals overwhelmed with patients and footage of sullen families barricaded inside their homes?

I think most of us failed to connect what was happening on TV with what could happen here.

Oh, I understand not you – you saw it all coming.

Me too, of course, as I’ve banged on about for months.

Well… maybe.

The truth is it’s very hard to truly envisage a reality revamp until it slaps you in the face.

In mid-February a good friend of mine was banging her head against the wall because all the factories she dealt with every day in China had shut-up shop. All of them!

In theory I knew this from the financial news – I’m a stock market junkie, after all.

What’s more I’d had a morbid fascination since January with what we then called the ‘novel coronavirus’.

But it wasn’t until I saw my friend despairing for her business – right there in front of me – that I truly weighed up what would happen if the virus got here. And then I sold some shares.

I think we’re in a similar place with the economy.

Look out below

Most people now understand that a lockdown craters the economy. The statistics are coming in every day – I’ve included a few in the links below – so it’s impossible to refute.

The debate now is how quickly we can bounce back, and to some extent whether it will prove to have been worth it.

But I don’t think any of us are really processing what this graph might look like in real-life:

The graph comes courtesy of the Bank of England, which this week told us it expects GDP to decline 14% in 2020 as a whole before rebounding 15% in 2021. It will be the worse slump for 300 years.

Does it yet feel like the worst slump in 300 years to you? Are we all so sanguine because we’re confident we’ll see the same ‘V’ that the Bank of England is sticking up in front of us?

Or are we not actually thinking about it?

Will we even get such a strong bounceback, after such disruptive chaos?

Economic forecasting is a thankless task and I don’t envy them their job, but these guys haven’t exactly covered themselves with glory with their predictions over the years. Anyone who has followed the inflation target saga can tell you that.

I do hope we’ll see a ‘V’, and provided Covid-19 quietens down it’s what you’d logically expect. Whatever the pros and cons of our economy, the recession we’re in wasn’t precipitated because the economy was structurally overwhelmed. It’s more like a storm that superficially smashes the place up (the pandemic), as opposed to dry rot that ruins the foundations from the inside out (sub-prime mortgages or dotcom valuations or over-powerful unions or too much crappy investment or whatnot).

If the big bazookas being fired this way and that by the Government and the Bank of England have done the trick, we’ll have stunned the economy senseless for three months, but we could emerge something like how we went into it.

If…

The new most hated rally of all time

Time will tell. As for the stock market, I’m still not as offended by the rally as most people.

Central Bank action has lopped off the truly disastrous tail risks that the market was facing in March.

After that, the shares that have rallied the most are by far the superior companies. As I’ve mentioned before, in many cases they’re companies directly benefiting from global lockdown Even where they’re not, their valuations are typically based on earnings due far into the future.

In contrast, the hardest hit firms are mostly still in the dumpster.

Also consider when exactly we’re likely to see meaningfully higher interest rates.

I have I hard time imagining UK Bank Rate reaching even 2% by 2030. Anything is possible, but for reference a 30-year gilt is currently yielding 0.53% so don’t hold your breath.

I bought my flat after a decade of prevarication and got my stupidly big mortgage because I finally became convinced rates weren’t going anywhere in a hurry. That was more than two years ago. Now future rate rises will take the extra-scenic route, and stop off in every quaint village along the way.

Companies that survive the imminent recession are almost certainly going to do much better than cash in the bank over the next 10 years. If some of the world’s 1% have the spare money to buy them now while they’re still – just about – on sale, is it any surprise?

Of course markets can do anything, so it equally wouldn’t surprise me if we saw the indices halve again by Christmas. I’m just saying I don’t think the rally is unjustified.

Anyway have a great long weekend, and I hope neither the virus nor the counter-measures have laid you too low!

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What caught my eye this week.

Mixed events in the global soap opera saga Coronavirus this week.

The good news is the Prime Minister returned from that episode to tell us we’re probably past the peak of Covid-19.

The focus now is on R, aka the reproduction number. Keep it under ‘1’ and the pandemic is not spreading exponentially.

As a nation our R number is now somewhere under 1. Probably between 0.5 and 0.75, although it may still be higher in some places like (tragically) care homes.

Ruh-Roh

The lower the R the better, obviously, but the question will increasingly be how much more [insert what matters most to you] damage we can take to lower it further?

Getting R down from the 3 to 4.5 level that looked like it might overrun the NHS was a no-brainer. But there’ll be diminishing returns.

Full lockdown – or even just heavy social distancing – has health as well as economic consequences, too. Some people will die earlier because we brought a recession upon ourselves.

Yet equally, every micro-notch higher in R that we accept means someone somewhere will die before their time from Covid-19.

That’s the equation for the upcoming weeks.

There are no easy answers. Perhaps there was a more promising hypothesis, but the past seven days looks to have done for it.

Spread ’em

I’ve been mildly obsessed with Covid-19 since January (and mildly infected, I believe, in early March). I’ve ridden a rollercoaster from being precociously concerned to evasive action to believing things might not be as bad as was thought and now I’m halfway back again.

Long story short ¹ a series of intuitions (or guesses, if you prefer) informed by endless reading about Covid-19 convinced me the virus was spreading far faster in the UK than was generally thought likely.

All the experts knew the virus was spreading more quickly than reported cases, of course. But I (no expert) believed it was circulating faster again.

That was a comforting thesis because it suggested (1) the virus wasn’t as deadly as even the more middling predictions suggested and (2) we might reach some level of herd immunity sooner rather than later.

It’s long been clear this virus has a Great White Shark’s nose for the elderly and vulnerable, and I’ve been frustrated we either couldn’t or didn’t shield them better.

But in a super-infectious scenario, for the vast majority of us Covid-19 would be a very mild infection, mostly asymptomatic.

And by the time full lockdown was called, I felt it was possible a large number of us in London at least had already had it.

That proved to be right… a bit.

Peak deaths for the virus occurred in early April. Working backwards gets you to peak infections towards the end of the second week of March.

But how many? For that we can first consider deaths.

It’s hard to unpick the roughly 30,000 or so excess deaths we’ve seen so far in England and Wales in 2020.

Most will be due to Covid-19, but some may have been attributed to the virus incorrectly. For example, there were fewer heart disease related deaths in March. Perhaps some were blamed on Covid-19?

But just crudely guessing 30,000 and assuming an infection fatality rate (IFR) of 1%, that gets you to three million or so infected, with peak infection probably occurring in or around the period of voluntary lockdown, but just before mandated lockdown.

So overall millions have been infected – but not enough to be good news.

Unless… the IFR was much less than 1%, because far more people had been infected?

Start spreading the blues

That left antibody testing carrying the baby.

The hope was antibody testing would reveal that in areas of rampant morbidity to the coronavirus – such as Italy, London, and New York – many, MANY more people had been infected.

If this was true then you could indeed pull down the IFR.

Well, over the past seven days we got the first large scale data – from New York City and Stockholm – and it’s probably not good enough.

The New York City testing is the most promising, implying 25% of its citizens have had Covid-19. However, while that shocked the media it was much lower than I’d been hoping for.

Indeed as reader @Vanguardfan points out, 25% implies an on-consensus IFR of around 1%, if you take into account the number of presumed deaths to Covid-19 in New York City.

And 1% is no comfort if you apply it to the UK’s population of 67 million.

Now, not every last citizen will need to throw the viral dice – we should get some natural resistance to the virus on a population level, before everyone has had it.

However if we assume the chunky herd immunity thresholds that most experts think we’d need to see – at least 50%, possibly more like 70+% – even New York is far from having ‘earned’ an inherent resistance through its deathly exposure ².

This is disappointing to me, though it won’t be unexpected to the experts. It looks like they called it.

Hopium

Much is still unknown about this virus. For every potential fact I find in early research about it, you can retort with another. Anyone waiting for scientific confidence (proof, for shorthand) better have a lot of series lined up on Netflix.

The huge list of Covid-19 links below (perhaps 20% of what I’ve read this week) gives just a taster.

It’s possible that amid this uncertainty there may be other off-ramps from the bad (though not worst-case) scenario:

• Maybe a large number of people can kill the virus with their immune system so easily that they don’t develop antibodies.

• Or maybe it’s spread much more widely among the most vulnerable parts of society, which is terrible news right now, but may have elevated the fatality rate and hopefully left the survivors with some resistance.

• Summer could well curb the spread anyway, which at the least should give us time to better prepare for any resurgence.

• Maybe the herd immunity threshold will prove lower than presupposed.

• Or more likely it may turn out that just a few key social distancing actions – no handshakes, avoiding crowds indoors, and washing your hands – will do 90% of the R-lowering. (The Swedish approach.)

• Kids may not be infectious, too, taking them out of the equation altogether.

I have reasons for making all those suggestions, based on my own reading.

But the truth is there’s an equally long list of reasons to be pessimistic.

As Freddie Sayers concludes in a sober piece on UnHerd that pits Sweden’s top epidemiologist against our own leading figure:

…it’s time to stop pretending that our response to this threat is simply a scientific question, or even an easy moral choice between right and wrong.

It’s a question of what sort of world we want to live in, and at what cost.

An ‘ell of a recession

Bottom line: I no longer hope for a very quick exit from this nightmare, unless perhaps R collapses extremely rapidly in the next few weeks and we can go back to trying test and tracing.

And this probably kicks the V-shaped recovery into the long grass. The drag from physical distancing and other anti-viral precautions alone could knock a few percentage points off GDP, even if we go back to semi-normal.

What are football matches, trade conferences, pubs, easy air travel, and the Glastonbury Festival worth to GDP, to name but a few lost causes?

Even if fatal Covid-19 cases do plunge and more normality can be reinstated, for as long as outbreaks flare up it may be hard to persuade some people to take their chances.

We’ve been bombarded with deathly warnings about the virus and kept under house arrest for a couple of months on its account. Dinner and a show on Friday night? Many may continue to Deliveroo and chill instead.

And while a cocktail of better treatments (drugs and regimens) will probably be assembled by the end of the year, that’s, well, the end of the year.

So L-shaped recovery it is. Probably what’s priced in by the global stock markets, anyway.

You see, a lot of people are talking about market mania after the quick bounce from the March lows.

But this is mostly a US market thing. And in the US market it’s mostly a tech thing. And of the tech companies, it’s mostly a bunch of cloud giants who couldn’t have come up with a better driver of demand than ‘shelter in place’. Strong demand now, plus their valuations turn on the years of prodigious earnings they’re expected to make long after Covid-19.

No, if you want a market that’s geared to the global economy, look to the UK’s FTSE 100. Its 2020 performance (red) already looks like an ‘L’, versus the (blue) S&P 500’s squint a bit ‘V’:

Source: Yahoo Finance

I’ve always been more worried about the financial impact of global lockdown than most, even while I was slightly more sanguine about the virus.

And now I see economy-dinging restrictions continuing.

So I’ve a horrible feeling that while the UK pandemic probably is past its peak, with the economy it’s like we’re back when people were gasping at footage of Italians stuck inside, hardly realizing the sort of misery we’d soon face.

Note: Fed up with virus chat? I’m planning to drastically reduce the number of Covid-19 links here next week. We’ve just hit that peak, too!

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1. Read the past two months of Weekend Reading comments for the real-time discussion![↩]
2. Presuming such an immunity actually exists, which isn’t definitively proven, but which seems likely.[↩]