Our Thoughts on Recent Market Volatility

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When the markets react like they have lately, the last thing you want to hear is “keep calm and carry on.”  We get it.  We see losses in our portfolios just like you’ve seen in yours.  And just like you, we remember what our account was worth just a few weeks ago.  Virtually everyone suffers from this recency bias.  We remember most what happened recently.

Most investors remember the decline in December of 2018.  (If you don’t, take a look at your investment statements for that month.)  Companies were lowering their estimates of how much income they’ll earn and many issued earnings warnings.[1]  Given that most companies’ stock prices rely on what the company will earn, a significant stock price decline was understandable.  Putting further pressure on stock prices was the Federal Reserve’s decision to raise interest rates for the fourth time in 2018.[2]

In January of 2019, the S&P 500 Index rose by 7.87% and in February, it rose by another 2.97%.[3]  This quick recovery from the December declines has perhaps lulled us into a more relaxed view towards market declines.

In the more distant past, we had the Great Recession of 2008-09.  Here’s what some of the monthly declines in the S&P 500 looked like in 2008[4]:

January       -6%.

February     -3.2%

June            -8.4%

September   -8.9%

October       -16.8%

November   -7.2%

Keep in mind that while this was going on, the unemployment rate in the U.S. was going from 5% in January to 7.3% in December.  Unlike 2008, the U.S. reported an unemployment rate of 3.5%[5] in February of this year, down from 4% in January of 2019[6].  My point here is that this is not 2008.  We have a fairly healthy economy, reasonably low unemployment, and historically low interest rates.  As an example, the [7]2-year U.S. Treasury Note is currently yielding 0.38%.  The 10-year Treasury Note yields 0.78% and the 30-year Treasury note yields a paltry 1.36%.[8]

While the phrase “this too shall pass” seems trivial and in some respects, downright annoying, it’s also accurate.  In October of 1987, we thought it was the end of the financial markets when the stock market fell 22.6% in a single day and we wondered if the financial markets would open the next day.[9]  The Dow Jones Industrial Average started that memorable day at 2,246.  On, March 12, 2020, it closed at 22,200, almost ten times as much and this does not include dividends!  Clearly, this was one of those instances where this too did pass.

Most people understand that it is impossible to time the market without a working crystal ball.  But this is easily forgotten when the daily headlines announce that your net worth may be falling by 4-9% in a single day, when the stock portion of your portfolio has fallen by 20% in record time.  The natural question is: should I get out now and avoid more of the same?

While I have absolutely no knowledge of viruses, my personal belief is that we may not be talking about the coronavirus as a health issue three months from now.  I also believe that our economy could possibly recover from any downturn within the next two to three quarters.  So, should you be selling right now?  There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling.  The best strategy has, in the past, been to ride out this market and experience the subsequent upturn—which may come tomorrow, next week, next month or next year.


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