The “Coronavirus Crash”—What Have We Learned?

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On February 19th, the United States stock market measured by the S&P 500 index closed at an all-time high of 3,386.15. Nearly 6 months later, the S&P 500 recorded another all-time high on August 18th closing at 3,389.78.  However, between those two dates was the fastest and most dramatic decline in the stock market since the Great Depression. We experienced untold suffering on a global scale as COVID-19 laid waste to businesses and the health of individuals. As such, it is important to reflect on the coronavirus crash to learn as much as we can.

1. Consistently timing the market is very difficult, if not impossible.

Not many saw the coronavirus coming. Even fewer anticipated the dramatic decline in the stock market that we experienced in February and March. And again, fewer still predicted the stock market recovery in the months to follow.

We believe selling your long-term investments under the assumption that you can accurately predict the short-term movements of the stock market is unwise. Some get lucky. But few if any have been able to consistently predict the future with any degree of accuracy.  

Lesson: Don’t make investment decisions based on your prediction of short-term market movements. 

2. Declines in the stock market are incredibly common.

We experienced a 34% peak-to-trough decline in the stock market as a result of the coronavirus. Drops of this size are actually fairly common (albeit not normally as rapid). In fact, there have been 4 market declines of 30% or more in the last two decades alone.  It’s not a question of if there will be another large market decline, only a question of when.

Lesson: Do not panic when the next market decline comes.

3. The stock market has recovered from 100% of all prior declines.

Throughout history the U.S. stock market has declined for a variety of reasons: world wars, presidential assassinations, natural disasters, terrorist attacks, financial crises, and yes, worldwide pandemics. What do all of these declines have in common? They have all recovered. Every single stock market decline has been followed by a recovery. Sure, individual businesses go under. But as a whole, the economy has continued to grow. The coronavirus crash was no exception.

Lesson: Be patient. History suggests that the stock market will rebound.

4. We still have hope for stock investing as a means of building wealth.

Over the last 200+ years of investing, the stock market has vastly outperformed other investing alternatives such as bonds, bills, and especially gold.[1] Stock investing has helped countless investors create significant wealth in the past and we don’t have any reason to believe it won’t continue as a great investment option in the years to come. The survival of U.S. companies through the coronavirus evidences their resiliency.

Lesson: Do not lose faith in stocks as a long-term, wealth building investment.

5. News headlines promote irrational investor behavior.

It is easy to see how one might become pessimistic listening to news headlines. Pandemics, elections, wars, natural disasters- the list goes on and on. However, as stated above, history suggests that the stock market will rebound from these global events and move on to new heights. Investors responding to headlines tend to make mistakes with their investment portfolios that can be damaging in the long run.

Lesson: Do not let headlines affect your outlook on stock investing.

During the coronavirus crash, we did not know when the recovery would come, but we were confident a recovery would occur. We stuck to our mantra that “this too shall pass.” Fortunately for everyone, the stock market recovery came on August 18th. Let’s not lose sight of the lessons we’ve learned when the next market crash comes.  

[1] See Stocks for the Long Run by Jeremy Siegel, page 6.

Logan Jones
Partner & Wealth Manager CFP®, CIMA®, CPWA®, CEPA