In the last two weeks, we’ve made new records in the stock market: Biggest one-week drop, Biggest one-day gain, and Biggest one-day loss in the history of the stock market, in chronological order. Those records tell us that consumers, and even the know-it-all day traders, don’t know where the bottom of the market is. What started as fear of the coronavirus has turned into fear of global economic slowing and longer-term anxiety of a US recession.
Uncharted Territory – Stock Market Records Set in March 2020:
- First time the Dow dropped 2000+ points
- First time Circuit Breaker rules used since 2013 (when the stock market trading is temporarily halted due to a dramatic decline in value)
- 30-year US treasury yield dipped below 1%
These days, it doesn’t take much to trigger panic in a market already on edge. On Monday, the US stock market trading was halted shortly after opening due to the market reaching a benchmark drop of 7%. The manic Monday drop in the stock market was due to failed negotiation talks between Saudi Arabia and Russia regarding oil production that triggered an all-out price war. This caused a plunge in oil prices of 30% that rippled across the remainder of the stock market quickly. The decrease in oil prices from roughly $63/barrel in April 2019 to below $30/barrel during Monday trading created increased pressure on the credit market. Energy companies, such as oil producers, are the largest issuers of junk bonds. With their future revenues in limbo, the value and credit quality of their bonds became even more unstable. As evidence, investors flooded into the security of government-backed debt and the 30-year US Treasury yield traded at 0.99% for the first time in the history of the stock market.
The White House followed up with market stimulus measures. On Tuesday, President Trump announced payroll tax breaks for corporations and employees through the rest of the year. Trump also continued to put pressure on the Fed for further interest rate cuts. This comes on top of the $8.3 billion spending package President Trump signed in early March to combat coronavirus through vaccine research and medical support to states currently dealing with COVID-19 patients.
Ironically, this week marks the 11th anniversary of the bull market which began on March 9, 2009. From the last market high on February 19, 2020, the Standard & Poor’s 500 (S&P 500) is down approximately 12%. If the index drops 20%, the “correction” will officially be labeled a “bear market” and we’ll have ended our bull market streak in February.
Taking a step back to reflect, since the start of our bull market in March 2009, we’ve had seven corrections of 10%+ decline in the stock market. Those corrections averaged to a decline of 15% and lasted 78 days. Examining further back to 1990, the average correction increases slightly to 18.8% over a span of 83 days.
No one truly knows if we are near the bottom of the stock market decline or if there are additional record setting days to come (good or bad). As companies get ready to post Q1 results, I would not be surprised to see declining earnings across the board due to shifts in consumer behavior related to COVID-19. However, those lower financial results are likely already priced into the stock value via the negative trading days recently witnessed. Often, because the stock market is so forward looking, the equity markets begins to turn around before we’ve seen the worst of the health epidemic at hand. That’s because when we’re in the midst of gloom, the market is fixated ahead and already sees the light at the end of the tunnel.
Fundamentally, the US economy is strong. We’re simply at the end of the market cycle and many have forgotten that we need some down market years to ensure stock prices don’t stray too far from the true valuations of the companies they represent. Our advice remains consistent. These volatile trading days highlight the resiliency of diversified portfolios and the need for a measured amount of fixed income to offset equity volatility. Furthermore, systematic rebalancing in up and down markets ensures your investment portfolio adheres to the original target customized to your risk tolerance. As Schwab’s Chief Investment Strategist, Liz Ann Sonders stated this week, “Those tried-and-true disciplines are the closest thing an investor can get to a ‘free lunch’ in this crazy business.”
Age-old investment advice:
- Neither “get in” nor “get out” are investment strategies…they represent gambling on moments in time, when investing should ALWAYS be a process over time.
- Panic is not an investment strategy.