The longest “bull” market in history is now officially over. It started in March 2009 and ended on March 11th, 2020 as we officially hit a “bear” market (defined as a 20% decline from its peak).
Now this happened fast. Really fast. Since 1915, the average amount of days for stocks to go from peak to bear market territory is 255. This happened in 28 days.
This is a bit of an apples to oranges comparison though. Nowadays, nearly all trading is done by algorithms, not humans. In other words, there are pre-set rules to dictate selling if stocks/indices hit a certain level. We’ve seen this result in “flash crashes” in both 2010 and 2015.
Algorithmic trading + social media = faster market downturns. News spreads like wildfire now which can induce more panic, which causes more selling, which causes these fast market declines.
So what now?
The World Health Organization has officially declared the Coronavirus a pandemic. You are seeing exponential growth in the confirmed cases of Coronavirus and countries are taking drastic measures to stop the spreading. Here are some examples:
- Italy has essentially shut down its country. All non-essential shops and services are closed.
- President Trump declared a travel ban from Europe for all non-US citizens for the next 30 days.
- Universities and schools are closing its doors.
- Nearly all sports have suspended or cancel their seasons.
- Nearly all major technology companies are having their employees work from home.
This will almost certainly impact global economic growth in the short-term. Companies’ supply chains are disrupted and more importantly, consumers will spend less money as more and more people stay in their homes.
My guess is that countries will continue taking more aggressive measures to control this virus, similar to what Italy is doing. This will likely result in more volatility in the short-term and the possibility of markets dropping further.
Why there is reason for hope as an investor
Okay, that sounded pretty grim, but I don’t want to downplay the reaction to this virus.
This is different than the financial crisis
The last time we experienced a recession was the financial crisis in 2007 – 2008. Things were very different then. The financial crisis was caused by banks and other lenders giving mortgages to basically anyone over the age of 18 and then turning around and selling those risky mortgages to other financial institutions to get them off their books.
Said differently, there was a fundamental issue with our financial system which is the backbone of our economy. In addition, consumers had a huge amount of debt that they were defaulting on. Faulty financial system + a weak consumer = a bad recession.
In today’s environment, both the financial system and the consumer are in much better shape. The financial system is much more heavily regulated, holds required safety reserves and is much stricter on its lending standards. The consumer has historically low levels of debt and is benefitting from both low interest rates and low gas prices.
We will very likely see a rise in unemployment rates, but the hope is that it will be short lived.
The fatality rate of the Coronavirus is heavily skewed
The news focuses on how the death rate for the Coronavirus is much higher compared to the flu (3.48% vs. 0.01%). However, the death rate is extremely skewed to people over the age of 70.
Given that the symptoms of Coronavirus can be minor, my guess is that the 3.48% mortality rate is overstated because it doesn’t take into account the amount of unconfirmed cases.
I’m certainly not saying this doesn’t matter – we all have loved ones who are over the age of 70 and at higher risk. I’m just providing data that shows the media hype of the severity of this virus may be inflated for people that are below the age of 70.
The economic effects of this may be short lived
The stock market is a leading indictor of economic activity. Although the stock market is down over 20%, we haven’t seen a big effect on companies yet. This will very likely come in the next few quarters as companies report earnings and reduce their guidance for the year.
We will likely see companies lay off people, but that will likely be focused in the industries hit hardest by the Coronavirus – travel and hospitality.
However, most companies are still in good shape. They learned a lesson from the financial crisis to hold sufficient cash reserves to help weather an economic downturn.
If the spread of the virus starts to get under control (as it has in China now…), then consumer will continue spending and the companies will likely pick up where they were prior to the Coronavirus.
Okay… now the stats of why it’s important not to sell right now
As humans, we are hardwired to buy more of things that bring us pleasure and less of things that bring us pain. But with markets, that’s the opposite of buying low and selling high.
It’s so natural to feel the urge to get out of the market right now, but it’s so important to stick with it.
Here are some charts/statistics to show you the importance of staying invested.
- It’s very costly to miss the best market days.
- Research cited by Wim Antoon found that for the period December 1927 through December 2015, the average gain during the first three months after a market downturn was 21.4%.
- According to a J.P. Morgan study, six of the 10 best days (in the history of the stock market), occurred within two weeks of the 10 worst days. We saw this on Tuesday, March 10th when the market increased over 5%.
- Since 1926 there have been 11 bear markets and 12 bull markets. The average bear market lasted 1.3 years. The average bull market lasted 6.6 years. Average losses from bear markets were a cumulative -38%, while the average gains from bull markets were a cumulative 339%.
There are two parts of market timing – 1) when do you get out and 2) when do you get back in. It’s hard enough to predict one of these, but you have to get both right or else you would have been better off staying invested.
Nobody knows how long this will continue. However, as history has taught us, we are resilient and can quickly rebound. We have experienced virus outbreaks in the past and although this seems to be more contagious than others, countries are taking drastic measures to prevent the spread.
I hope you can focus more on keeping you and your family healthy, and less on how this virus impacts your investments.
As long as your core values, goals and fundamental reasons for investing haven’t changed, then you shouldn’t be changing your investment strategy.
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