This Bear Market Feels Worse ... But We Will Get Through It

The Week: Morningstar columnist Rodney Hobson offers some lessons from history on the coronavirus panic and the new bear market in UK stocks

Rodney Hobson 13 March, 2020 | 9:21AM
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Does it hurt? Only when I laugh. It may seem hard to believe on Friday the 13th but one day we will be able to look back on this week and laugh. And it will no longer hurt.

Bear markets tend to be short and brutal compared with bull markets. The three years and two months of suffering at the start of the millennium was exceptionally long. When shares lost three-quarters of their value in 1973-4 it happened in 18 months. The crash that followed the global financial crisis, which seemed at the time to be the end of capitalism and internationalism as we knew it, stretched to scarcely more than a year, though it seemed an eternity at the time.

Every bear market is the same only different. I can’t remember the FTSE 100 index losing 500 points twice in one week, or even a comparable double drop in percentage terms. I know memory plays funny tricks, but I don’t think we have had quite this level of panic before.

In modern markets we have computers as well as human beings panicking, and computers panic more than humans. Downward swings are thus exaggerated. Bear markets are likely to become shorter and more brutal.

The Footsie has fallen from 7,674 points in mid-January to 5,237, a drop of more than 2,400 points. That’s a remarkable 31.8% in less than two months. We may not hit the bottom until the pandemic peaks.

When we do turn the corner, markets are likely to rise quickly. If you have the stomach for investing, look for companies with high yields, so if the dividend is reduced you will still get a decent return. Look for companies with low debt. Any losses run up during the crisis will add to the longterm problems of companies that already have a large debt burden.

Why I Don’t Like Guesswork

The idea of stock market announcements is to keep shareholders fully informed of developments. It is a requirement of the London Stock Exchange and any other reputable exchange and it is also no more than shareholders are entitled to.

For a prime example of how not to do it, I recommend a quick look at the opening paragraph of a trading statement issued by logistics group Dart (DTG). Thanks to a strong performance in the leisure travel business, profits for the year to March 31 will be well ahead of expectations. But hang on a minute. A reduction in flying capacity in the coming financial year means unspecified hedging arrangements will become ineffective, which will eat into those profits.

Dart doesn’t say how next year’s hedging affects this year’s profits, nor whether the net effect is to wipe out all the gains. My immediate guess was that Dart would still be ahead of the game, but that was only a guess.

In any case, Dart claims to be providing 16% more seats in its planes, so what’s that about reduced capacity? The company seems to have secured more bookings for this summer despite a tailing off as the coronavirus panic bites so this should have been a clearly positive statement. I just felt that after reading it twice I really didn’t understand quite where the company stands. If I don’t understand, I don’t invest.

Alas, the policy of delaying the spread of coronavirus in the UK and elsewhere is going to drag out the agony without any likelihood that the number of cases and deaths will be reduced. China and Italy, where the outbreak exploded, may yet come out of this disaster best because they will get back to normal fastest.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.