During the last week of February 2020, the S&P 500 lost 11.49% — the worst week for stocks since the 2008 financial crisis — only to jump by 4.6% on the first Monday in March.1 Then we saw an even more dramatic drop as the Corona Virus started to spread and the market tumbled to numbers lower than when Trump took office in January 2017. By all accounts, the drop was largely driven by ever-increasing fears about the potential effects of the coronavirus (COVID-19) and its ultimate impact on the global economy. Although many market observers contend that the market was overvalued and due for a correction anyway, the unpredictability, strength, and suddenness of the historic tumble was unnerving for even the most seasoned investors. If recent volatility is causing you to consider cashing out of your stock holdings, it may be worthwhile to pause and put recent events into perspective, using history as a guide.
A look back
Since the turn of the millennium, the market’s negative response to health crises has been relatively short-lived. As this table shows, approximately six months after early reports of a major outbreak, the S&P 500 bounced back by an average of 10.47%. After 12 months, it rebounded by an average of 17.17%. Although there are no guarantees the current situation will follow a similar pattern, it may be reassuring to know that over even longer periods of time, stocks typically regain their upward trajectory, helping long-term investors who hold steady to recoup their temporary losses, catch their breath, and go on to pursue their goals.
|Epidemic||Month end*||6-month performance, S&P 500||12-month performance, S&P 500|
|Avian (Bird) flu||June 2006||11.66%||18.36%|
|Swine flu (H1N1)||April 2009**||18.72%||35.96%|
What should you do?
First, keep in mind that market downturns sometimes offer the chance to pick up potentially solid stocks at value prices, which could position a portfolio well for future growth. Again, there are no guarantees that stocks will perform to anyone’s expectations — and decisions could result in losses including a possible loss in principal — but it may be helpful to remember that some investors use downturns as opportunities to buy stocks that were previously overvalued relative to their perceived earnings potential.
Moreover, if you typically invest set amounts into your portfolio at regular intervals — a strategy known as dollar-cost averaging (DCA), which is commonly used in workplace retirement plans and college investment plans — take heart in knowing you’re utilizing a method of investing that helps you behave like the value investors noted above. Through DCA, your investment dollars purchase fewer shares when prices are high, and more shares when prices drop. Essentially, in a down market, you automatically “buy low,” one of the most fundamental investment tenets. Over extended periods of volatility, DCA can result in a lower average cost for your holdings than the investment’s average price over the same time period.
Finally and perhaps most important, during trying times like this, it may help to focus less on daily market swings and more on the fundamentals; that is, review your investment objectives and time horizon, and revisit your asset allocation to make sure it’s still appropriate for your needs. Your allocation can shift in unexpected ways due to changes in market cycles, so you may discover the need to rebalance your allocation by selling holdings in one asset class and investing more in another. (Keep in mind that rebalancing in a taxable account can result in income tax consequences.)