A Breath of Fresh Air in the Stock Market
We hope you are staying safe and well! Recently, life has been awkward and uncomfortable for all of us. The past few weeks have not been fun. However, we do believe the drastic measures that have been implemented by state governments are ultimately helping achieve the long-term goals of minimizing the spread of the virus and returning to normal life.
This week was a breath of fresh air in the stock market. Here are the daily returns of the S&P 500:
We’re thankful, although not surprised, that the market has rallied significantly over the past few days. Markets rarely go up or down in a straight line. This week’s rally got us thinking about historical declines (of similar magnitude) in the market, and what happened next.
First, here is a chart of the S&P 500 during the fall of 1987:
As you can see, after the initial decline, the market staged a rally, then fell back to the initial crash level. This second oval marked the end of the decline, after which the market started increasing.
Secondly, here is a chart of the S&P 500 during the 2008 financial crisis:
In this case, the market hit three consecutive lows, each about 12% lower than the previous low, with rallies in between. It took roughly six months from the first oval to the third, which marked the ultimate end of the decline. This period of time was especially difficult for investors. Every time the market kept decreasing, it became more and more tempting to sell out of stocks.
Finally, here is a chart of the S&P 500 during 2018:
In this instance, the market fell about 20% over a period of a few months, then reversed and did not go back down.
What does this have to do with your investments? Here are some points to consider:
- Stock markets can bottom at a point in time or over a period of time. In 1987 and 2008 it was a period of time. In 2018, it was a point in time. It’s possible the current decline in the market is over, and it’s possible that it’s not quite over yet.
- If markets take time to bottom, it’s generally measured in weeks or months. This seems like an eternity at the time, but over a long investment horizon, it’s not that long.
- The decisions we make during these market environments have immense impact on longer term returns. Investors who stick out difficult markets are rewarded with future returns.
- We are prepared for multiple scenarios over the coming months. We don’t focus on one outcome and hope it plays out.
- Ideally, our clients will either hold their current asset allocation, or add new cash at predetermined market levels. These actions give investors the best possible chance for attractive returns.
We aim to communicate our thoughts effectively with these periodic updates. If you have specific questions, please call or email and we’ll be sure to respond to you as soon as possible. In the meantime, we hope this helps reassure you and give perspective with regard to the current markets.