Volatility in the stock market continued this week after a slight recovery the previous week.  After gaining 455 points last week, the Dow Industrial Average opened down 2,000 points today (closed down 2,023).  Fear, panic, and overreaction to the Coronavirus has temporarily overpowered the multitude of positive elements to the U.S. economy.  This is not new.  We have seen it before.  It is very uncomfortable to witness these sharp changes in value.  However, it is incredibly important to remain patient and to not make major changes during transitory events such as what we are experiencing currently.  The long-term opportunities for investors remain firmly intact.  There are reasons that the market selloff feels particularly harsh right now.   These include:

  1. We started from the absolute highest point.  The Dow was at an all-time high as recently as February 12th.
  2. The impetus for the recent stock market decline is the Coronavirus.  Personal health concerns have unnecessarily been combined with corporate health concerns.
  3. Newscasts, anchors, and reporters have used the fear from the Coronavirus and panic within some investors to create over-dramatic programming.  The majority of media reports are produced to engage viewers by dire reporting and unbridled sensationalism.
  4. It is a Presidential election year.  Any topic (Coronavirus, oil price wars, and candidate success/failure) are all used and abused for political purposes.
  5. The numbers are just bigger because of scale.  A 10% change in the Dow 10 years ago was 690 points.  Today, a 10% change in the Dow is 2,500 points.

There will be an impact on corporate earnings but it will be temporary.  It is important that as investors that we lift ourselves from the near-term craziness within the stock markets to a longer-term point of view.  The effects of the coronavirus on the stock market are temporary.  Investors who sell today (or in the midst of this downturn) will be the ones who make it permanent for themselves.   

Within the middle of a market selloff it may be difficult to remember why it is important to stay invested and how this is not a permanent event.  As recently as three weeks ago stocks were at 29,551 on the Dow.  The economy that supported that level will still be in place when the Coronavirus event has passed.  The economy is in a very solid position:

  1. Unemployment rate is 3.5%.
  2. Over 200,000 new jobs were created last month
  3. Interest rates are low
  4. Consumers are strong
  5. Inflation is low

When the this period has passed not only will the above elements remain there will be an added “tailwind” of:

  1.  Even lower interest rate (Federal Reserve is lowering rates) will exist.  Provides additional liquidity and leverage
  2. Lower energy prices (gasoline and oil) will help boost the ecoomy
  3. Additional stimulus will be in the system – U.S., China, & International Monetary Fund are all releasing stimulus in the global economy

Finally, the stock market will begin re-pricing in all the strengths of the economy even before it is clear that the Coronavirus has past.  The stock market is a present value mechanism that looks well into the future.  The future will return to a positive perspective and equity prices will reflect it.

Below is information on technical sell-offs that I first produced at the end of 2018.  At that time we did not know what would happen after the close of 2018.  Now we can include information for that period as well.  I thought it might be important to revisit the same concept now.

  • The last four technical sell-offs have resulted in very strong 2-year returns, post-decline
    • 7/17/1998 to 10/8/1998 the S&P 500 declined 18.52%%.  From 10/8/1998 to 10/8/2000 the S&P 500 gained 49.20%
    • 7/21/2011 to 10/03/2011 the S&P 500 declined 17.84%.  From 10/03/2011 to 10/03/2013 the S&P 500 gained 59.15%
    • 11/13/2015 to 2/11/2016 the S&P 500 declined 12.81%.  From 02/11/2016 to 02/08/2018 the S&P 500 gained 48.91%
    • 09/20/2018 to 12/24/2018 the S&P 500 declined 19.33%.  From 12/24/2018 to 12/31/2019 the S&P 500 gained 31.47%
    • 02/12/2020 to 03/9/2020 the S&P 500 declined 18.19%                

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