Our perspective on US Equities

The importance of thinking long-term

Times appear bleak. We are in the grip of a pandemic, the global economy has ground to a halt, the S&P 500 has (at the time of writing) fallen 25% from recent highs and economic and virus data are almost certain to get worse before they get better. 

It is important to remember though that stock prices already embed an expectation of the future. As a case in point, on Thursday 26th March it was announced that the number of Americans filing for unemployment benefits had risen by more than three million in a week, four times the previous highest increase. In response, the Dow Jones Industrial Average index pushed ahead to complete its best three-day streak since 1933, up over 20% in those three days. If nothing else, this reinforces a valuable lesson – that attempting to time each move of the market is an incredibly challenging endeavour and one that typically costs investors over time.

A study by the Schwab Center for Financial Research found that between 1950 and 2019, the annualised return from the S&P 500 was 7.8%. However, missing only the 10 best days would have cost more than a full percentage point of those annualised returns. In the midst of the current crisis, on Tuesday 24th March the S&P 500 recorded its third-best single-day advance since 1950 and there have been three other days in the last two weeks that now qualify for the top 20. The Schwab study might have put it best as: ‘Time in the market is more valuable than timing the market.’

We find it even more interesting that the best days in the market have typically occurred in the most worrying of times. If we look more closely at the best 20 days for returns from the S&P 500 between 1950 and 2019, then 15 out of the top 20 days occurred during bear markets. Another three occurred within weeks of a bear market bottom. These very positive days happened when investor fear was at its highest, when it seemed obvious that the market would fall further. While the past is not a reliable guide to the future, this research does show how valuable it has been previously to hold on to stocks during the most alarming of times. Only in hindsight does the full picture become clearer. When financial markets decline, many financial commentators will say ‘think long-term’ and it remains good advice. Even in the depths of the last financial crisis and recession, after the S&P 500 fell over 50%, equity investors had still achieved an 8% annualised return over the previous 20 years. 

In no way does this mean we are complacent about protecting our investors’ capital. We remain vigilant about assessing future risk and potential for returns. We invest in individual companies from different industries, with very distinct challenges and opportunities. We have redoubled our efforts to ensure that our companies and their balance sheets are sufficiently robust to meet new challenges. Where we see significant risk of capital impairment, we have exited positions as a result. Correlations across the market have spiked, stocks of poor companies and stocks of great companies have been indiscriminately sold together during the recent declines. This has created opportunities to increase position sizes in companies in which we have great conviction and initiate new positions in companies that were previously too richly valued to provide an adequate future return. We will continue to adjust our holdings to balance the risk of the coronavirus, and future risks, as diligently as possible. 

Marlborough US Equities team, 31st March 2020

Risk Warnings

Capital is at risk. This is not advice. The value and income from investments can go down as well as up and are not guaranteed. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.

Regulatory Information

Issued by Marlborough Fund Managers Ltd, authorised and regulated by the Financial Conduct Authority (reference number 141660). Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Registered in England No. 02061177.