Coronavirus and the Market: Four Things We've Learned
May 4, 2020
By Michael List, CFP®
Following a series of unprecedented months, May is here. And it feels like a breath of fresh air (albeit one cautiously inhaled through a face mask). While uncertainty remains, we’ve learned a lot over the last several weeks.
1) Stocks can rise as economic news worsens.
Analysts will be busy this month sifting through data for indications of the shape of the economic downturn and its ultimate path to recovery. It’s clear we are still in the early stages of the downturn. So why are stocks rising in the face of seemingly unremitting bad news?
While market and economic behaviors are closely related, they are not often synchronized in time. Financial markets are almost always forward-looking. The news may be bad today (and it is!), but financial markets – with the help and support of massive fiscal and monetary stimulus – are starting to ‘look over the valley’. This is a true-to-life example of the old saying that the stock market ‘climbs a wall of worry’. Time will tell whether the timing is correct, but the rise is completely consistent with past market behavior in the midst of economic challenges.
2) The economic recovery will be uneven across the country.
States in the U.S. were hit with the virus at different times and magnitudes, with varying degrees of quarantine and restrictions, and mixed reopening timelines.
Some states have begun reopening by lifting restrictions on various segments of their economy including retail, food and drink, and recreation. Last week, eighteen states were partially reopened. Another five will follow this week, and thirteen more scheduled in the following two weeks.
At the same time, an end to forced lockdowns does not mean a near-term return to ‘business as usual’ in America or the world. Manufacturing activity, food processing, and supply chain logistics will not revert to January efficiency by the first of June. Think of travel, transportation, and entertainment – those sectors are changed for some time to come. Millions of jobs will be changed in nature and availability. Given our dependence on consumer spending for economic growth, the path back may be longer, choppier, and unevenly distributed across the country.
3) Volatility will remain elevated in the near future.
Volatility will remain elevated but, in our opinion, below the extreme levels of the past two months. In one for the record books, March produced two of the largest daily declines since 1987. What’s more, the twelve down days in the month fell by an average of 5% per episode, the same as the average gain during the ten up days. Dramamine sales rose dramatically in March. The level of volatility relented in April, but the market still averaged daily swings of 2%.
4) Miss the worst days, miss the best days.
The S&P 500 started a new quarter on April 1 with the biggest drop in a quarter-century, yet finished April with the biggest one-month gain since the rebound from the October crash in 1987. This demonstrates the unpredictability of returns in compressed periods and our tendency to generalize. Most might say March was unremittingly bleak, while April was a steady climb. In reality, both months had record-setting ups and downs, sometimes within days of one another.
This supports a tenet of our investment process. We don’t try to time the markets. Studies show that the worst days are often followed by the best. And, if one misses out, long term returns are significantly impacted. Missing the ten best days over the last 20 years cut market returns by 3.6%.
Skeptics will say, ‘Yes, you may miss the best days but you also will miss the worst.’ True, but human nature usually leads to selling after prices fall -- the fear of losing additional value outweighs the benefit gained from disciplined investment throughout the market cycle. And, again, history shows that the best returns are usually achieved in the early stage of market rebounds.
We don’t know what the future will bring as we recover from these unprecedented events. We do believe, however, that a conservative, valuation-conscious approach to management will provide the best opportunity for long term success. If you want to learn more about how we work for your long term success, contact an Advisor today.