The investment markets are in full panic mode, the result of the World Health Organization declaring the Covid-19 virus to be a global pandemic and nationwide cancellations of professional and collegiate sports, universities and colleges, Broadway and virtually any event where people would typically gather. Traders on Wall Street are selling at virtually any price. Thursday’s 10% decline was the stock market’s worst day since the 1987 crash. The long bull run that started in March 2009, and set many records along the way, is now officially over.
It is almost impossible to keep a rational perspective in the middle of a herd that is stampeding toward the exits, and this particular stampede can fairly be described as one of the worst in market history. Michael Batnick, director of research at NYC investment manager Ritholtz Wealth Management noted, this is the fastest bear market ever; that is, the fastest that the U.S. stock market has experienced a decline of 20% or more going back to 1915. The average number of days from peak to a 20% decline is 255, and the median is 156. The recent market selloff reached this dubious achievement in just 17 trading sessions. By contrast, the fabled 1929 market downturn took 36 sessions.
The Covid-19 pandemic (as it is now known) should first be considered a health issue, and everybody should do what they can to protect themselves and their families from the spread of the disease. Roughly 80% of Covid-19 cases tend to be mild or moderate but those who are older or have underlying health conditions are at a higher risk.
Denise Grady, The New York Times’ veteran health and medicine reporter wrote: “Early estimates of the coronavirus death rate from China, the epicenter of the outbreak, have been around 2 percent. But a new report on 1,099 cases from many parts of China, published on Friday in The New England Journal of Medicine, finds a lower rate: 1.4 percent. The coronavirus death rate may be even lower, if — as most experts suspect — there are many mild or symptom‐free cases that have not been detected. The true death rate could turn out to be similar to that of a severe seasonal flu, below 1 percent, according to an editorial published in the journal by Dr. Anthony S. Fauci and Dr. H. Clifford Lane, of the National Institute of Allergy and Infectious Diseases, and Dr. Robert R. Redfield, director of the Centers for Disease Control and Prevention.” Reports indicate that the elderly and people with pre-existing health issues are far more likely to die of the virus than younger and healthier people, and the death rate outside of China has been roughly half of the Chinese experience. More testing will be needed before we know the full extent of the infected population and the morbid statistics for those who are infected.
But once health precautions are taken, it is appropriate to address the potential for losses, and how best to navigate the market conditions. If the market continues to deteriorate, it’s certain that our emotions will be tested. Even in the worst historical markets, stocks never went straight down. Often times there are several bear market rallies that give investors a sigh of relief, only to see further downturns.
There are news reports that the U.S. government will propose a payroll tax cut, and possibly also bailouts of key publicly traded companies in the travel and entertainment industry. The Federal Reserve Board has cut a key interest rate by half a percent and on Thursday injected $1.5 trillion dollars of liquidity into the short-term funding markets.
Historically, bear markets have been less impactful than their bull market counterparts, as you can see from the accompanying chart. Of course, you could argue that a global pandemic is different from a housing market crash. Research analysts at Goldman Sachs took a look back at “event-driven” bear markets; that is, market declines that were not driven by an economic recession, but instead were triggered by things like war, oil price shocks or an emerging-market crisis. They found that the average event-driven bear market resulted in a 29% decline—on average. The report notes that we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.
The harder conversation is about market timing. 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 is falling by 4-7% 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?
There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish. The best strategy has, in the past, been to ride out the downturn and experience the subsequent upturn—which may come tomorrow, next week, next month or next year.
Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health. There is a real danger in selling at the bottom and then missing out on the recovery. Talking about being a long-term investor during a bull market is relatively easy. Behaving like a long-term investor during a bear market is a far more difficult task.