Nerves are frayed in this bear market but there are shards of light to be found for forward-looking portfolios
The economy is on its knees and investors are dusting themselves off after a rapid downturn that shredded portfolios before markets surged back with a bear market rally. It’s enough to fray even Warren Buffett’s and Ray Dalio’s nerves.
However, there are reasons for cautious optimism. While a different era to the cruise control record bull market, there are ways to navigate these volatile times and maintain a positive outlook for the future, according to Capital Group’s mid-year outlook.
1, Take a look over the valley
We all know the decade-long economic expansion did not end quietly, with the coronavirus pandemic bringing it to a screeching halt. U.S. GDP fell 5% in the first quarter while Canadian GDP declined 2.1%, and steeper declines are expected for the second quarter. Then there is historic unemployment and a plethora of failing businesses.
Longer term, Rob Lovelace, vice chairman of Capital Group and portfolio manager of Capital Group Canadian Focused Equity Fund (Canada) said there is a silver lining. He said: “Because the slowdown was the result of government policy — underlying economic fundamentals were reasonably healthy — a solid recovery is possible.
“We can see the other side of the valley, what recovery can look like when policies are relaxed, and that to me is reassuring.”
2, Nothing ever lasts forever – including bear markets
It doesn’t feel like it right now but bear markets do end. The past three months might feel like three years but don’t despair. Remember that for the U.S. stock market in the post-World War II era, bull markets have been far more robust and have lasted considerably longer as well.
While every market decline is unique, over the past 70 years the average bear market has lasted 14 months and resulted in an average loss of 33%. The average bull market has run for 72 months — or more than five times longer — and the average gain has been 279%.
Moreover, returns have often been strongest right after the market bottoms. After the carnage of 2008, U.S. stocks finished 2009 with a 23% gain. Lovelace said that missing a bounce back can cost you a lot, which is why it’s important to consider staying invested. “Recoveries are rarely a smooth ride, but investors who can look past the short-term volatility and remain focused on the long-term picture have often been rewarded for their patience.”
3, How Golden Arches rose from the ashes
The report reminds investors that tough companies are often started in tough times. McDonald’s emerged in 1948 following a downturn caused by the U.S. government’s demobilization from a wartime economy. Walmart came along 14 years later, around the time of the “Flash Crash of 1962” — a period when the Standard & Poor’s 500 Composite Index declined 27%. Airbus, Microsoft and Starbucks, meanwhile, were founded during the stagflation era of the 1970s, a decade marked by two recessions and one of the worst bear markets in U.S. history.
“Not long after that, Steve Jobs walked into his garage and started a small company called Apple. History has shown that strong businesses find a way to survive, and even thrive, in volatile markets and difficult economic conditions,” added the outlook.
“Companies that are able to adapt and grow in tough times often present attractive long-term investment opportunities. Bottom-up, fundamental research is the key to separating these resilient companies from those likely to be left behind. Which companies will emerge as market leaders after the COVID-19 crisis? Only time, and solid research, will tell.”
4, There are winners out there
A look under the hood of the U.S. stock market shows there has been a stark divide between winners and losers in this era of limited mobility. Online retailers and grocers have enjoyed strong sales growth as consumers eat in and do their shopping in front of a screen. Providers of broadband, health care, home improvement materials and educational services have also benefited from healthy demand.
On the flip side, restaurants, travel and leisure companies, and aerospace companies have seen sales evaporate. “Some of this activity reflects an acceleration of existing trends, some is temporary and some represents fundamental shifts in behaviour,” Lovelace said, adding that selective investing will be critical going forward. “Our job as active investors is to seek to identify the long-term winners and losers.”
