THE AGONY IS BRUTAL. BUT HERE’S HOW IT WILL GET BETTER
How bad can it get? That’s the question on the lips of investors, from the largest wall Street operators to the most modest pension saver. It may seem unfeeling, even callous, to think about money when people’s lives and health are in jeopardy.
But think about it we must. Millions of people who just a few weeks ago thought they had a healthy nest-egg and a safe job have had their financial security torpedoed.
on Tuesday, Chancellor Rishi Sunak launched one of Britain’s biggest peacetime financial interventions to save the economy, unleashing a £350 billion lifeboat for struggling firms and families. Yet only hours later, the FTSE 100 share index lurched down again.
These terrifying plunges on the stock market, which have happened with sickening regularity since the pandemic struck, are heightening the sense of dread we all feel.
To put it at its bleakest, Covid-19 is not only attacking our loved ones and ourselves. It is also laying waste to companies, our investments, our savings and our jobs.
Trade in pubs, clubs and other entertainment businesses has ground to a halt since the Government warned people to stop socialising. More than 3million people work in that industry and are now in fear for their livelihoods.
I’m sorry to say I don’t feel able to offer a great deal of comfort in the short term.
YET I do believe in the resilience of our capitalist system, for all its faults. And I have absolute faith in the creativity and the sheer dogged guts of Britain’s entrepreneurs.
As for shares, most of us are exposed to them through our pensions and savings, and will be feeling queasy at the falls. The FTSE 100 is down around a third since the start of the year, one of the worst routs ever chronicled.
History tells us that stock markets recover from even the worst of traumas. In finance as in life, the great healer is time.
But to put it bluntly, some older investors don’t have time on their side. And this crash might be different, with a destruction of value more catastrophic than ever before.
Never forget, though, that in the 20th century the City produced far better returns for investors than if they had put cash in a deposit savings account or bought government bonds.
That is despite some very daunting setbacks indeed, not least the First world war and the Spanish Flu epidemic that came after it. Then there was the wall Street Crash and the Great Depression, followed by the Second world war.
The most recent debacle was, of course, the financial crisis of 2008.
Regardless of all of those horrors, shares have always bounced back and outperformed every other financial asset. After taking account of inflation, UK shares have produced an average annual return of 5.5 per cent a year since 1900.
‘Safe’ government bonds have given a return of just 1.9 per cent.
Put another way, if your greatgrandma had invested £1 in the stock market in 1900, you would have inherited £637.50 in today’s money. If she had invested £1 in bonds, you would have just £9.50.
But while history suggests that recovery will eventually come, there will be more turbulence.
The sharp falls in markets in the past few weeks have led to speculation that trading could be suspended. In that case, share prices would be frozen temporarily and investors would not be able to sell and get their money back. This is a bit like what happened to the funds run by disgraced manager Neil woodford. It is also now happening with property funds, where investors are being locked in.
In the UK, suspensions of the whole market are incredibly rare – a testament in itself to how trading is hard-wired into our national DNA.
The last time there was an extended pause was in 1914, when the London stock market was closed from July until January 1915. Small investors could still trade their shares, however, through the Daily Mail, thanks to a service set up by City editor Charles Duguid.
Share values were resilient too. In 1939 and 1940, shares fell, but in the rest of the war years, they were in positive territory.
of course, it is hard to take a calm perspective from history when you are watching savings that have taken years of hard work to accumulate vanish in moments. It is even more alarming when the world’s most powerful politicians and central banks roll out their heaviest weaponry to seemingly no effect. More is to come, and Andrew Bailey, who started as Governor of the Bank of England this week, has confirmed that ‘nothing is off the table’. The airlines will almost certainly have to be bailed out.
Economic life as we know it is grinding to a halt as countries go into lockdown.
The virus has so far exposed targets such as the now bust airline Flybe, which was over-indebted and fragile already. Now it may also prove lethal to businesses that are perfectly viable in normal circumstance. No company, however prudent and well run, can survive a near total loss of business overnight.
WoRRYINGLY, many have been far from prudent. The International Monetary Fund warned last autumn there is about £15trillion of borrowing that companies would struggle to repay in a downturn. It is not an exaggeration to say this is a crisis of capitalism as well as a health crisis.
I am pretty sure the situation on the stock market, and out there in the real economy, will get worse before it gets better. Markets are not abstract, they are driven by human beings. Those all-too-human traders, so susceptible to greed and fear, are operating in a state of blind terror, which is hardly the best state of mind for making rational investment decisions.
However bad it seems, the overwhelming chances are that shares will recover.
I’ve never forgotten a visit to Mostar after the Bosnian war in the early 1990s. Among the rubble, someone had opened a café and put up bright umbrellas and pots of flowers.
It was a beacon, a symbol of our innate human desire to improve our circumstances and those of our families. In the difficult days to come, we need to remember things will get better, medically and financially – and hold on to that thought.