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Have faith in the economy long term, says Ivey professor

  • Dawn Milne
  • |
  • Apr 16, 2020
Have faith in the economy long term, says Ivey professor

Although the COVID-19 crisis has taken a toll on the stock market and shaken investors, Steve Foerster says there’s no need to panic and the economy will eventually turn around.

“Pandemics and wars take a tragic human toll; not necessarily a long-term economic toll,” he said. “Have faith in the economy long term, keep calm, and carry on.”

Instead, he said taking a look back at past economic declines and disasters can help us to face this one.

For a webinar called Lessons from History: Stock Market Crashes, Recoveries, Pandemics, and Wars, Foerster, a finance professor, turned to examples from history to show how the stock market has traditionally declined and recovered during wars and pandemics. Here are some key takeaways.

Stocks for the long run have paid off 

Foerster demonstrated how the S&P 500 index has consistently trended upward from 1927 to 2020. There were many stock market crashes along the way, including Black Monday in 1987, the dot-com bubble from 2000-02, and the global financial crisis from 2007-09, but the stock market has always bounced back. 

In fact, he said if you had invested $100 in a diversified portfolio of U.S. stocks in late 1927, just before the Great Depression, you’d have $185,500 today (assuming dividends of three per cent and that you reinvested all dividends and capital gains). 

“This really goes back to the time value of money and the magic of compounding,” he said. “Stocks for the long run have paid off. The average return over a long period of time has been in the 8- to 9-per-cent range. Despite all the turmoil recently in the markets, we’re still on this long-term trend.”

Dropping out could cause you to lose out

While some investors look closely to the Volatility Index (VIX), a measure of market risk and investors' sentiments, and get out of the market when the VIX rises, Foerster said doing so will cause them to miss out on the gains that are likely to come. Compared to today, he said markets were equally volatile during the Great Depression and global financial crisis and in the long term it pays off to stay in the game. Even in recent months during the COVID-19 pandemic, he said we have seen some major stock market increases to balance out the drops. 

“If you are out of the market in a very volatile time, you are not only going to miss out on some of the major drops, but you are going to miss out on some of the major rebounds,” he said. “Be very cautious about getting out of the market during a volatile time because you might miss the major upswings.”

Use history as your guide

Pick any disaster in history and you’ll notice a common trend when it comes to the stock market – crises only have a small impact on the market overall. Foerster said in three past crises – the 1918 flu pandemic, the Second World War, and the 2003 SARS pandemic – there was an initial market decline followed by a comeback that’s in line with long-term trends. In fact, during the 1918 flu pandemic, he said the stock market rose during three major waves of the virus.

Although history doesn’t repeat, Foerster said we can learn a lot from it when it comes to the stock market.

“I'm a firm believer that we can learn a lot from history,” he said. “Knowing what has happened in the past can really inform some of our investment decisions today.”

And while acknowledging that this is a time of unprecedented disruption, and each bear and bull run is unique in terms of when we can expect a recovery, his advice is to keep your mind off your investments and wait things out.

“My recommendation is that if you have an app that tracks your investment performance or your retirement performance on a daily basis, get rid of that app … I look at my investment portfolio once a year,” he said.