Second Crash: hopes of V shape recovery fade

Yesterday the UK posted a 2% contraction in economic activity for the first quarter of this year with a 5.8% contraction in March alone. This gives a rather grim outlook for the second quarter of which has been dominated by lockdown. There is no getting out of the fact that we are in a recession which will be confirmed in July/August (technically).

There had been hopes of a V sharp recovery, this would mean a sharp crash followed by a sharp recovery. I thinking this recession will be more of a typical L shape recovery, a sharp crash with a more gradual recovery.

Look to past crashes

I would argue that we are currently following a similar path that most crashes follow, especially the 2008 Great Recession and 1929 Great Depression. The FTSE 100 fell 33% from 20th February to the “bottom” before climbing 15% to today. The S&P 500 has followed a near identical path falling 34% to then climb 26% over the same time period.

While many have speculated that this could mean a V shaped recovery I would be very cautious as this is in line with past recessions. I believe we have been in a bear market rally which is beginning to end before another sharp fall. Goldman Sachs at the beginning of May forecast a second quarter contraction of 34% in the US. The UK will undoubtable follow this trend. These are some of the sharpest declines experienced over the last 200 years.

The Bank of England forecast at the beginning of May that unemployment rates could reach 10% from the current 4% and that economic growth could be -14% in 2020 with a contraction of 25% in the second quarter. This is highly likely to play out in the stock markets around the world with a large contraction.

My strategy for a further crash

A lot of people will sell out of the stock markets when their stocks start to fall by large amounts, this is a natural reaction to prevent incurring further losses. We should resist the urge to sell when our stocks go down, you only loose money when you sell. We will need to aggressively cost-average our positions.

This means that as our stocks go down in value we should continue to buy more of the stock to drive down the average cost per share of the stock. Then when a recovery does occur potential returns will be higher. I expect this to be a very scary strategy as I will have to get used to seeing negative returns while continuing to add to them.

However, providing that you have invested in good stocks that have low debt to equity ratios, good cash flow and good payout ratios you should be able to weather the storm. Additionally, do not under estimate the value of having a well funded emergency fund should you need to draw upon it if the worst happens.

 

None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: