Keep calm & carry on
The past few weeks have been wild ones on the stock markets, with stocks trading up and down. Last week markets moved more than 2% every day. Monday was up, Tuesday down, Wednesday up 4.4%, then down Thursday and Friday. This Monday was the worst day since 2008 and then Tuesday was up and recovered over ½ of the drop from Monday. Source: https://www.bloomberg.com/markets
It is hard to watch the financial news sometimes without having nerves of steel. It’s like the down part of a roller coast. However, this is part of the price of owning stocks and when we get past these days, other days are much better. It’s very possible we will continue to have more downs and ups over the next while. In order to understand the market let’s look at why this is happening:
There is lots of uncertainty right now and this makes the stock market jittery. Markets can overreact with uncertainty before rational thinking steps back in. The uncertainty is from:
a. Corona-Virus first and foremost. How will this affect the economy? The situation is evolving quickly. Many companies are letting their employees work from home to keep it from spreading, some universities will do online classes for the rest of the semester, conferences are being cancelled, people aren’t travelling, Italy is on lockdown etc. All of these are good to try to get ahold of the spread of the Coronavirus, and it will have an impact on economic growth. If people are not out and about, they are not spending money and that reduces company profits which are what stock prices are based upon.
b. Russia and Saudi Arabia are in a price war over oil which was part of the impetus on Monday for the big down day.
What can you do?
1. Tune out the financial news for the time being. We know the media sensationalizes the news with big headlines to draw your attention and it can be frightening.
2. Stay the course and remain diversified. A properly diversified portfolio is built to withstand events such as this. Your investment portfolios are designed to be less volatile with a mix of securities, bonds, alternative investments, etc. So when the markets drop 10%, your portfolios might not go down as much.
3. Stick to your plan. The most important piece of advice is to sit back and wait for the market to stabilize. The volatility of this market most likely will not affect your long term retirement goals. Short term outcomes are not the same as long term success.
4. Consider history. It can be helpful to look at past unsettled markets to see how portfolios reacted. Looking back 40 years, previous epidemics have all led to the S&P 500 increasing in value over the six months after the virus was discovered, except for the HIV/AIDS epidemic in 1981. Even then, the decline was minimal. Over 12 months, there were only two instances of the market declining after the disease was discovered. There is a possibility that the coronavirus impacts the global economy more than previous epidemics; however, the stock market’s track record of a quick recovery from these events can be reassuring.
Market Declines are Common
The DOW has increased from a March 2009 (Financial Crisis) low of about 7,000 to 25,000 today (or 29,000 last week). That is a 300-400% increase in 11 years. During those 11 years, there were 18 instances where it fell 5% or more. Historical patterns suggest we should expect events like this around twice per year.
In the past forty years, the average intra-year decline for the S&P 500 is 14%. Even last year when it returned 29%, it fell 7% at one point during the month of May.
Conclusion: The Short-Term is Unknown and Scary but the Long-Term Trend is Clear
Like you, I don’t know how long this lasts or how bad it will get. But I do know what the past 70 years have looked like. The chart below shows that the historical worst-case 1-year rate of return for equities is -39%, but the worst-case over 10 years is -1%. Most of our investing time horizons are in the 10+ years range, and I’ll take those odds every time.
If you have any questions please don’t hesitate to contact me.