With global stock markets suffering major sell offs in recent weeks, people are now questioning how does this current environment compare to that of the other 8, larger S&P500 corrections in history?
Remember the three things that have to be present to trigger a major stock market correction.
- There are recessionary factors already present like negative growth, high unemployment and a rise in bankruptcies.
- A macro shock which is linked to 50% of all S&P corrections. These include the onset of World War 2, The Asian currency crisis and the Eurozone crisis.
- The rising cost of Capital which has been a factor in 70% of all pullbacks (i.e. 25 out of 36 pullbacks). On some occasions, that rising cost of capital triggered the recession and/or shock.
So what should be the next move?
Whilst this 2020 shock to markets around the world is worrying and affects all economies, it is essential that the bond markets are kept liquid and resist panic from investors wanting to move back to cash. This has had the effect of drying up liquidity and requiring the Australian government to announce overnight plans to ease liquidity.
We have learnt a lot from how we dealt with the GFC in 2008 and the different stimulus packages that averted a recession in Australia.
The best we can all do is to remain calm and vigilant and look at the bigger picture. Most investors should have a time frame of 5 years and enough cash to support your spending for 3. This will avoid the need to pay the price of cashing out.
Stay healthy and happy social distancing!