Reflections on the 5th Anniversary of the UK's First COVID Lockdown: Investment Markets' Reaction and Recovery
With the 5th anniversary of the UK's first COVID lockdown on March 23rd, it's a poignant moment to reflect on how the investment markets reacted during this unprecedented time. The S&P 500 and the FTSE All Share serve as prime examples of the market's volatility and resilience during the pandemic.
On February 19, 2020, the S&P 500 began its decline, reaching its lowest point on March 23, 2020, with a drop of 34%. However, the recovery was swift, with the S&P 500 bouncing back 47% in just five months. This rapid recovery was driven by several factors, including the resilience of the US economy, the power of tech giants, and the euphoria for AI investments. The S&P 500's performance during the COVID-19 pandemic was notable for its rapid recovery, marking the fastest bull market rally since WWII.
In contrast, the FTSE All Share index saw a dramatic decline during the pandemic, dropping to 2837 on March 23, 2020, its lowest point since June 2012. The FTSE All Share has since regained its vibrancy, rising 63.63% from its lowest point . However, the recovery was slower compared to the S&P 500. The FTSE All Share took just under 17 months to return to its pre-crisis peak in total return terms. So, why did the S&P 500 recover faster than the FTSE All Share during COVID?
Several factors contributed to the S&P 500's quicker recovery:
Resilient US Economy: The US economy showed remarkable resilience during the pandemic, supported by substantial fiscal and monetary stimulus measures. These measures helped stabilise the economy and boost investor confidence.
Tech Giants' Influence: The S&P 500 is heavily weighted towards technology companies, which thrived during the pandemic as remote work and digital services became essential. Companies like Apple, Microsoft, and Amazon played a significant role in driving the index's recovery.
Euphoria for AI Investments: The pandemic accelerated the adoption of artificial intelligence and other innovative technologies, leading to increased investments in tech stocks. This euphoria for AI investments further propelled the S&P 500 to record levels.
On the other hand, the FTSE All Share faced additional challenges:
Brexit Uncertainty: Prior to the pandemic, the FTSE All Share was already grappling with uncertainties related to Brexit. These concerns continued to weigh on the index during the pandemic, slowing its recovery.
Sector Composition: The FTSE All Share has a different sector composition compared to the S&P 500, with a higher weighting towards sectors like financials and energy. These sectors were more adversely affected by the pandemic, contributing to the slower recovery.
Market Sentiment: Investor sentiment towards UK stocks was more cautious during the pandemic, partly due to the perceived higher risks associated with Brexit and the UK's handling of the crisis.
Investor Sentiment During the Pandemic
Investor sentiment played a crucial role in the market's reaction and recovery during the COVID-19 pandemic. The pandemic induced significant anxiety and uncertainty among investors, leading to sharp declines in stock markets worldwide. Negative sentiment, driven by fears of economic downturn and health crises, increased market volatility and decreased stock returns.
However, as governments and central banks implemented stimulus measures and vaccine rollouts began, positive sentiment started to emerge. Investors became more optimistic about the future, leading to increased stock returns and reduced volatility. This shift in sentiment was particularly evident in the US, where the S&P 500 experienced a rapid recovery. In contrast, the FTSE All Share's recovery was slower, partly due to lingering uncertainties related to Brexit and the UK's handling of the pandemic. Investor sentiment towards UK stocks remained cautious, contributing to the slower rebound.
Fiscal Stimulus Measures During the Pandemic
The fiscal response to the COVID-19 pandemic was unprecedented in scale and scope. In the US, the government implemented a series of stimulus measures to support the economy and provide relief to those affected by the crisis. These measures included:
Stimulus Checks: Direct payments to individuals to help alleviate financial stress and boost consumer spending.
Paycheck Protection Program (PPP): Loans to small businesses to help them retain employees and cover essential expenses.
Unemployment Benefits: Enhanced unemployment benefits to support those who lost their jobs due to the pandemic.
Eviction and Foreclosure Moratoriums: Temporary bans on evictions and foreclosures to protect vulnerable households.
Student Loan Forbearance: Suspension of student loan payments to provide financial relief to borrowers.
These fiscal measures, combined with monetary policy actions such as interest rate cuts and quantitative easing, played a crucial role in stabilizing the economy and restoring investor confidence. The US government's fiscal response totaled approximately $5.6 trillion, significantly increasing the federal debt but helping to put the economy on a path to recovery.
In the UK, the government also implemented various fiscal stimulus measures, including:
Furlough Scheme: Financial support to employers to retain employees during periods of reduced business activity.
Business Grants: Grants to support small businesses affected by lockdowns and restrictions.
Tax Deferrals: Temporary deferrals of tax payments to provide liquidity to businesses.
Loan Guarantees: Government-backed loans to help businesses access financing during the crisis.
These measures helped mitigate the economic impact of the pandemic and supported the recovery of the FTSE All Share.
These examples highlight the resilience of investment markets in the face of unprecedented challenges. The swift recovery of both the S&P 500 and the FTSE All Share underscores the importance of staying invested during turbulent times. As we reflect on the past five years, it's a reminder that time in the market, rather than timing the market, is crucial for long-term investment success.
With the global investment markets in a state of flux at present it is a useful reminder of the importance of remaining invested and not to panic and turn paper losses into real world ones. If you have concerns about the current performance of your portfolio or have questions about its ability to weather market storms then please feel free to get in touch by clicking on the link below.
