There’s a tremendous amount of uncertainty around the coronavirus. So much so that markets don’t know how to price in the economic impact yet. Plus, in the meantime, you have short-term traders fleeing stocks in droves. But this doesn’t mean that long-term investors have to or even should drop stocks, too.
The cumulative result is that right now, U.S. markets are close to 20% from their recent peak — meaning we’re in bear market territory. The question on everyone’s mind is, “Could we drop more?” Of course, we could. But will we? Only time will tell.
What is certain is that every time markets are down, there’s a new culprit (or cause). And each time, that new culprit is accompanied by the destructive duo of uncertainty and fear. Otherwise, markets wouldn’t correct.
The fears surrounding the coronavirus are no different. While we are rapidly learning more about the virus — such as the actual mortality rate, the extent of how it will spread, and the measures we need to take to slow the spread — markets at large will stay uncertain. However, the information vacuum that’s creating the uncertainty and fear won’t last forever. When we have more certainty around the economic impact, markets are likely to settle down.
Corrections (a market tumble of 10% or more) and bear markets (a fall of 20% or more) are frequent and can be sparked by a variety of negative catalysts. War in the Middle East, World Wars, terrorist attacks, natural disasters, assassinations, and yes, multiple pandemics of grand proportion all have one thing in common: The downdraft recovers.
Markets recover because America recovers. Americans and the remarkable resilience of our people and our economic system devour every single problem and challenge we face — Americans work the problem. We will do the same with the coronavirus.
Fear is winning the market tug of war — for now. But know that fear won’t last forever.
So, what am I doing? I’m staying invested in high-quality, dividend-paying stocks. I’m also buying stocks the lower this market goes with the belief that the sun will come out tomorrow. Literally. The sunshine will replace the gloom of winter, kids will be out of school soon, and families will be outside enjoying the warmer weather.
Still, one big question that remains is the economic backdrop — meaning, whether we’ll go into recession. History tells us that bear markets without a recession averaged stock market drawdown of a little less than 20%. Bear markets with recessions average -35%. And corrections without a recession bounce back within five months, on average.
This leads us to the nuts and bolts, or a simplified version of the above: If people stop spending money for an extended period of time, then we will, of course, go into recession; if people merely slow down their spending for a few months, we will very likely avoid a recession.
What about the economy?
Some of the other economic crosscurrents we see right now deserve attention. Mortgage rates are at an all-time low, hovering around 3.0%, and gasoline prices are in a free fall.
Back in 2002, we saw West Texas Intermediate oil trade in the $30 range. At that time, prices at the pump dropped to under $1.00 per gallon. People could see gasoline prices drop close to a one-buck-per-gallon figure in the upcoming months.
Between historically low interest rates for mortgages and homeowners and cheaper prices at the pump, it is estimated that American consumers could save over $700 billion over the next year. $700 billion. That savings to the consumer could be far more powerful than any fiscal stimulus from the U.S. government.
Since 1980 — the past almost 40 years — this is the 19th correction of 10% or more we’ve experienced as Americans.
The average of all the corrections is 21%.
The average market drop without a recession is 16%. And the average drop with a recession is 34%.
As of March 11, 2020, the date I’m writing this, we are right around the -20% range.
Stock market corrections with recessions and without recessions
During corrections that did not coincide with a recession, the average 16% drop we discussed lasted about three months. On average, it then takes five months for the stock market to get back to “even.” When I say “even,” I mean back to the previous peak, essentially making up all of the losses.
Recessions (with drops of an average of 34%) were associated with tumbles that lasted, on average, 15 months. Then, it takes an average of 23 months to get back to “even.”
We’ve had a placid few years in markets without significant or scary pullbacks. I think it’s essential for a quick reality check on pullbacks — when they surface and how they end.
First, pullbacks are common. Consider how frequently at least one double-digit decline occurs within any given calendar year. Including this year, 23 of the last 41 calendar years — or almost 60% of the time — the S&P 500 saw a double-digit pullback within the year. In any given year, according to JP Morgan, the average pullback is 13.8%. But we’ve also seen 30 of those 41 years finish in positive territory.
What do investors do?
1. Remember your buckets of diversification: Keep multiple buckets of money. Keep some safe for the next one to two years, and also keep some allotted for assets/stocks for growth over the longer term (think 10 years or more).
2. Corrections happen: Very simply, understand that these drops do happen, and they happen often. Markets should recover within one to two years — or sooner — according to the data.
3. Recover: Remember, there’s always something new and seemingly insurmountable. But we as Americans work the problem and find a solution. Just because prices drop in a panic doesn’t mean they don’t come back.
All corrections are scary. But corrections and bear markets aren’t the end of the world as we know it. And neither is the current crisis we’re facing.
This correction has served as a great reminder that balance between safety assets (like bonds) and risk assets (like stocks) makes a combination that helps investors keep a level head during the eye of the storm, and as it passes.
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