Due to the Covid-19 pandemic, 2020 has been a good year for buying cheap shares — but only if bought at the right time. Unfortunately, buying before March was largely a bad idea. The FTSE 100 index hit its 2020 closing high of 7,674.6 points on 17 January and then plunged as Covid-19 went global.
By 23 March, the index had crashed by almost 35% to close at 4,993.9. This was one of the deepest and steepest market meltdowns in the index’s 36-year life. After November’s boom, the Footsie bounced back to nearly 6,500 points by early June, roughly where it stands today. But are there any lessons for investors from comparing Covid-19 to the 1918 flu epidemic?
Could this be another Roaring Twenties?
Covid-19 is far from the first global pandemic — it’s simply the worst in over a century. Humanity was regularly plagued by rampant disease, notably smallpox outbreaks before Edward Jenner pioneered vaccination in 1796. Smallpox routinely killed three in 10 sufferers and its eradication contributed hugely to the world population climbing eightfold in 200 years. More recently, the deadly Spanish flu epidemic of 1918–19 killed up to 50 million. But then came the Roaring Twenties, when stock prices soared for eight years as investors grabbed cheap shares.
Although cheap shares have surged worldwide since Halloween, stock prices never rise in a straight line. Hence, investors might learn something from looking back 100 years. When the flu epidemic eased off in 1919, pent-up demand for goods and services surged. Thus, the 1920s was a golden age for investors, especially in the US, which had become the world’s leading economic superpower. A robust, broad-based recovery created huge global prosperity, which is what we hope for from mass vaccinations in 2020. However, rapid rises in stock prices often sew the seeds of the next crash.
Cheap shares soared in the 1920s
When this public-health emergency subsides, consumers (especially the wealthy) will resume shopping and spending, boosting global growth. This happened in style in the 1920s, sending the Dow Jones Industrial Index soaring to new heights. After some steep falls, the Dow Jones closed on 24 August 1921 at 63.9 (versus over 30,000 today). It then soared like a firework, hitting a high of 381.17 on 3 September 1929. That’s a near-fivefold (497%) rise in eight years. Great news for buyers of cheap shares, right?
Then came two catastrophic economic events: the Wall Street Crash of October 1929, followed by the Great Depression of the 1930s. As the global economy collapsed, the Dow Jones crashed to close at 40.56 on 8 July 1932. This wipe-out of nearly 90% in under three years erased an entire decade of gains. Indeed, the index didn’t exceed its 1929 peak until 23 November 1954, more than a quarter-century later.
What lessons would I draw from this? The first is simple: buying high-priced stocks during a long bull market often works out badly. Therefore, I’m convinced that many US mega-cap tech stocks are very overpriced today, especially Elon Musk’s Tesla. Also, I see the S&P 500 index as having come too far, too soon since its March lows. 2021 will not be a perfect year and there will be many bumps along the way. Then again, despite the prospect of a no-deal Brexit, I still see value lurking in the FTSE 100. That’s why I’d buy cheap UK shares today for better returns in the 2020s!
