COVID-19 and the call to flatten the curve has wreaked absolute havoc on the United States economy. GDP shrank -4.8% in the 1st Quarter of 2020 and the 2nd Quarter is looking to have a large contraction with an even larger recovery in the 3rd Quarter. Total first-time unemployment claims since mid-March have grown to 36.5 million, which represents a 22.4% unemployment rate. The S&P 500 closed at an all-time high of 3,386.15 on February 19th and closed at a low of 2,237.40 nearly a month later on March 23rd. That means the S&P 500 fell by -33.92%. Since the end of WW2, over the past 75 years, there have only been four instances where the S&P 500 fell greater – assuming the worst is now over. This was, by all means, an epic drawdown in the market. However, had we not social distanced the economic repercussions would have been even worse.
That is the bad news.
The good news is the S&P 500 quickly recovered much of the losses and is, as of this writing, up to 2,863.70. This represents a rise of 27.99% since the mid-March lows. We still have a long way to go as we are still off the all-time high by -15.43%. But down -15.43% feels like a godsend compared to -33.92%. States are beginning to open up their economies, we did flatten the curve (for now), and there are glimmers of hope on what life may look like as we come out of this.
So where do we go from here with your investments? Is it time to sell and see what happens?
It’s boring and doesn’t make for great headlines – but staying the course is likely your best option.
Stick to the investment plan you created when things were calm and you were thinking with a level head.
If you are contributing funds each month like you would in your employer’s 401(k), then keep doing so (assuming your personal financial situation hasn’t negatively changed) since buying when prices are low is one of the best ways to build long term wealth.
Time in the market is much more important than trying to time the market. What I mean by that is most of your market gains come from just a few days a year. A study by JP Morgan shows that over the 20 years between January 1, 1999, and December 31, 2018, missing just the 10 best days in the stock market resulted in your overall return being cut in half. HALF! 10 days out of 7,300. And if you missed the 20 best days over those 20 years, your overall return was slightly negative. 20 days over 20 years drove the overall return in the market - essentially one day a year. Knowing when these best days are going to happen is impossible (unless you have a working time machine) and sitting on cash is a surefire way to miss them. By trying to time the market, you are way more likely to miss than hit. You would have better odds playing the roulette wheel.
At some point in the foreseeable future, a vaccine is likely to be developed. Do you know exactly when that is going to happen? What do you think the stock market is going to do once that is announced? There is a legitimate chance that will make for one of the greatest one-day rallies of all time. You could stay invested until that day happens – ensuring you benefit from it. Or you could gamble when that is going to happen by going in and out of the market.
I know which option I’m helping my clients choose.
The market falling by -33.92% in a month is enough to give the calmest of nerves some jitters. After all, now being down by -15% looks pretty good in comparison. It is natural for you to want to make the pain stop and get out of the market before even more carnage happens. But in doing so, you’d be locking in that loss when the market has always recovered. The cause of this panic is indeed different, but the recovery will not be different because there will be one. Capitalism always finds a way to recover – it’s the surest bet there is.
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About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.