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A few thoughts on coronavirus and the recent stock market crash

The Fund Manager

Unless you are a hermit living in a very remote cave, I’m sure you’re aware of the coronavirus pandemic.

And if you have any interest in investing, then you also probably know that stock markets around the globe have suffered what can only be described as a stock market crash.

Crash is a strong word, but with the FTSE 100 falling 26% (from 7,500 to 5,500) in less than a month it’s hard to call it anything else.

Technically speaking we are now in a bear market, which is somewhat arbitrarily defined as a decline of more than 20% from recent highs.

What does this mean for investors? Should we sell now and hide under a rock, or is there some alternative?

Before we do anything too hasty, let’s look at valuations.

As I write, the FTSE 100 is close to 5,500. That gives it a CAPE ratio (cyclically adjusted PE) of 11.3, well below its average value over the last 30 years of 18.4.

In fact, the FTSE 100’s CAPE ratio is now lower than at any time in the last 30 years, other than at the very bottom of the 2009 crash.

As for the FTSE 100’s dividend yield, it’s fractionally over 6%.

So with valuations at what I would conservatively call “cheap”, what should investors do?

Obviously I can’t tell you what to do, but I know what I’m going to do:

I’m going to keep putting money into the stock market on a regular basis

I’m going to keep looking for high yield, high quality stocks

I’m going to keep focusing on where economies and businesses might be in five or ten years

I’m going to keep ignoring day-to-day volatility

In short, I’m going to keep calm and carry on investing.

To some people that will sound crazy, but here are the assumptions I’m working under:

Coronavirus has a mortality rate of less than 5%, so it isn’t going to be the end of the world.

Within five years I think it’s likely that a) a reasonably successful vaccine will have been developed, approved and deployed, or b) the virus will be so commonplace that most people will have either had it and survived or will have just gotten used to living in a post-coronavirus world.

Given the assumptions above, I think it’s likely that this particular coronavirus will have little impact on the global economy five years from now.

If the economic impact is relatively short-lived (less than five years) then the impact on the long-term prospects of most good businesses will be minimal.

If most economies and most good businesses are back to normal within a few years, then earnings and valuations are likely to be back to normal within a few years as well.

If future earnings and valuations are approximately normal in say five years, then investing today at valuations that are well below normal is likely to produce above average returns over the medium to long-term.

If history tells us anything about this sort of thing, it is that the global economy has always bounced back from previous crises, including the Great Depression, World War II, the recessions of the 1970s, Black Monday in 1987, 9/11 and the dot-com crash and of course the recent Global Financial Crisis.

“It ain’t about how hard you hit. It’s about how hard you can get hit and keep moving forward” – Rocky Balboa

I’ll leave you with a few similar thoughts from someone much wiser than myself:

The Fund Manager

About John Kingham

John Kingham

John Kingham is the editor of UK Value Investor, the investment newsletter for defensive value investors. With a professional background in software analysis, John's approach to high yield, low risk investing is based on the Benjamin Graham tradition of being systematic and fact-based, rather than speculative. John is also the author of The Defensive Value Investor: A Complete Step-By-Step Guide to Building a High Yield, Low Risk Share Portfolio. His website can be found at: www.ukvalueinvestor.com.

Articles by John Kingham

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