Market Response to COVID-19. Should I panic?

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These are unprecedented times.  Worldwide people are learning terms like “social distancing” and “shelter in place”.  We’re (can I say “finally” without seeming like a jerk?) learning to wash our hands, cover our mouths when we cough, and stay home when we’re sick.  Although we’ve been told not to panic, and every published article starts with an admonishment not to, fear and anxiety are common reactions to social isolation, unemployment, and uncertainty.  Schools and many workplaces are closed.  People are concerned about our world and local economies.  Many wonder if this is the time to pull money from the market, or put it in.

 

I don’t have a crystal ball.  I don’t know when we will get back to normal; or even what a “new normal” might look like.  I want to show you some graphs of the stock market though.  Let’s start with a morsel of history.  During the Roaring Twenties our economy and the stock market experienced rapid expansion.  Stocks hit record highs.  “The Dow increased six-fold from August 1921 to September 1929.  Stock prices were so high some considered them to be a permanently high plateau.

 

– – AND THEN – –

The market fell 12.9% on 28 October 1929 and another 12% the following day.

This is sounding vaguely familiar.

– – BUT – – Wall Street

It wasn’t a high plateau to begin with.  It wasn’t a permanent bottom after the crash.  March 1932 the market sat at 1,353.99.  By April 4, 2007 it had grown to 12,530.05.  All was well.

 

– – AND THEN – –

Until September 29, 2008 when the market fell 777.68 points – the largest point drop in history.  We learned about “bank bailouts”, “the housing bubble” and “currency swaps with foreign central banks.”

– – BUT – – Wall Street

By January 4, 2010 the market was up to 10,583.96; by January 5, 2015, 17,501.65; and by January 2, 2020, 28,868.80.  All was well.  The bull market which ran from March 2009 – March 2020 was the longest in history (132 months over the previous record of 113 in the 90s).  People have been saying, “It can’t possibly go higher than this.  We’re at a plateau.”

 

– – AND THEN – –

It took just 20 trading days (12 Feb – 11 Mar) in 2020 for the market to fall 20.3%.  The fastest drop in history.  The median length for prior drawdowns (since 1915) is 156 days.

– – BUT – – Wall Street

When we look at the market from 1929 through today, it IS up.  The problem is this was a very large drop in a short period of time and markets don’t rise or fall in straight lines.

 

Another issue is a behavioral bias known as loss aversion.  We have a natural tendency to over weight losses relative to gains.  Behavioral economists say, in fact, that it takes gaining twice as much to cause the same emotional reaction as a loss.  Simplistically, we have to double our money to feel the same amount of emotion as we felt losing half as much.  Let’s look at this graph again.

 

Was this a big drop?  Yes.

Did it happen quickly?  Yes.

Are things uncertain and scary right now?  Yes.

Should we panic?  No.

Is this the end of the world?  I don’t think so.

Will the market return?  Yes.

When?  None of us can predict that at this point.  We don’t know.

I’m here.  If you have questions, concerns, suggestions for future blogs or live videos; if I can help in anyway, let me know.

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