After more than a decade of delivering phenomenal returns to investors, global equity indices reached their zeniths in the latter part of February. Economists had already begun to debate the timing of the natural end of the business cycle – itself also stretching back through the prior 10 years – and market pundits worried that the longest bull market in history was on its last legs. Then a true “black swan” event – the COVID-19 pandemic –overtook the world. But despite the cause of the market’s woes being so different, over the long term, the market’s response – and recovery – will likely not be.

 

 

It’s always darkest before the dawn

 

A black swan event is an unforeseen occurrence that has a substantial and meaningful impact. In short, it is a shocking surprise with often world-changing consequences, like the COVID-19 pandemic. It caught the world completely by surprise, and sideswiped the global economy and investment markets along with it. In response to the anticipated economic impact of physical distancing and massive shutdowns of major economies around the world, equity markets plunged and bond yields collapsed. This drove short-term interest rates to record lows, and government and high-grade corporate debt prices to record highs (bond yields have an inverse relationship to bond prices – when yields fall, prices rise, and vice versa).

Much of the market upheaval was generated by the uncertainty of the pandemic’s economic impact. Humans dislike information vacuums, and tend to fill a void with the worst possible scenarios. But with governments and central banks – not to mention companies, individuals and charitable organizations – stepping in quickly and forcefully to help individuals and businesses, some of the market angst was assuaged. This has helped to stabilize and even buoy stock values after a relatively short time.

 

The waiting is the hardest part

 

As most long-term investors know through experience, markets do go through periods of upheaval that lead to stretches of volatility, sometimes even extreme volatility. However, as the chart here shows, after such events pass – and they always do within a few months or quarters – investors have historically enjoyed substantial returns in the ensuing years.

 

This too shall pass

 

Previous major market events have been caused by economic, financial or social conflagrations, like wars or political crises. This black swan event was caused by a health crisis (and exacerbated by a dispute between Russia and Saudi Arabia over oil production that has led to collapsing oil prices). As a result, its length and impact is difficult to gauge, and its resolution still remains murky. Waiting out the uncertainty – and the consequent volatility – is always the difficult part for an investor. But what is becoming clearer by the day is that this too shall pass, and that patience, once again, will reward investors over time.