Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

There has been a growing sense of unreality about the gains made by stocks markets recently, so it comes as no surprise to see some realism return.

Sharp falls on Thursday and Friday have been added to a modest decline this morning - the FTSE 100 was down 1.5% to near 6,000 at time of writing - as investors digest news of rising Coronavirus cases in China and elsewhere. A downbeat forecast from the Federal Reserve in the US and a dramatic 20% fall in UK GDP for April last week have also dampened the mood.

For weeks markets have been on a steady march upwards, often in the face of grim economic data and only partial success among governments in tackling the pandemic. This suspension of disbelief appears now to have broken and investors have rediscovered their gloomy side.

The news from China that 80 new cases of the disease have been reported in Beijing after more than 50 days of zero increases is a reminder that Covid-19 will continue to stalk markets until a vaccine or effective therapeutic is both found and made available on a mass scale. While the numbers from China are still relatively low, they raise questions about the prospects of places like the UK and the US, where governments are desperate to reopen economies but cannot yet claim to have driven cases to levels anywhere near as low as the Chinese.

Predictions of a second wave are nothing new and scientific advisers the world over have stressed that new spikes in infections are their base-case forecast - they should come as no surprise. Yet markets have preferred to focus instead on positive news rather than negative, until the last week anyway. Cases of US states opening up from lockdown early have been watched closely for signs of new infections and optimism was rising that the worst predictions would not come to pass. Those hopes have been set back.

There will be further tests in the weeks ahead. Here in the UK, the furlough scheme that is supporting the wages of 8.9million workers will be reduced from August, meaning employers have to make decisions about the level of staff they wish to retain, and the numbers they feel they are forced to let go. A wave of redundancies is expected and this could put more pressure on shares, particularly those domestic facing companies in sectors most affected by lockdown.

Investors would be wise to expect this pattern - of rising optimism punctured by regular bouts of bad news - to continue. Notwithstanding the latest stumble, the experience of the pandemic so far has been that staying the course and continuing to invest will pay off in the long term. Regular investors with a long time horizon can take advantage of dips to buy in at lower levels, meaning they benefit more when asset prices do recover.

Lots of investors will be eying the sell button after days like we saw last week. Before they hit it, however, they should ask themselves - ‘if I sell, when will I buy in again?’ There will always be bad news for markets to worry about, so those hoping to sell down investments now will almost have to buy back in at a time when the outlook is still uncertain.

That’s the hard bit about trying to time markets. You don’t just need to get one call right, you need to get two. Selling out is the easy bit because you can do it and swim with the crowd at the same time. Buying back in, on the other hand, requires a contrarian approach that few, when it comes to it, are comfortable adopting.

More on Coronavirus and volatility

Five year performance

(%) As at 12 June 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
FTSE 100 -6.2 27.7 6.7 -0.1 -13.9

Past performance is not a reliable indicator of future returns

Source: FE, as at 12.6.20, total returns in GBP terms

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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