As human beings, we have certain behaviors wired into us. One such behavior or bias is that we often feel whatever trend is happening will continue indefinitely. It is easy for us to justify and rationalize this thought process. We are in the midst of a horrible war in Ukraine; for the first time in decades, inflation has become a significant factor in daily life. Interest rates have begun to rise and are anticipated to grow in the immediate future. The stock market has gone through a substantial correction in the last few months. It can only get worse, right?
Okay, Paul, what does that have to do with March 23, 2020?
On March 11, 2020, the World Health Organization (WHO) declared COVID 19 a pandemic, and restrictions on travel, work, retail stores, and social gatherings began to shut done much of the world. The US stock market tumbled 34% and hit bottom on March 23, 2020. It was the largest and quickest drop in history [including the depression and World War II].i
I don’t know anyone at that time who did not feel that the economy and the markets would only get worse.
A lot worse.
Then, on March 24, 2020, something completely unexpected happened, the S&P 500 US index rose 9% in one day and continued its mostly upward trend until earlier in 2022. In 2020, after losing 34% at the beginning of COVID, the index showed a calendar-year gain of about 16%.ii
Those who panicked with their portfolio at the depth of the market downturn incurred losses while those who ignored the bad news (hard to do) were rewarded.
The interesting thing about this is that while COVID continued to worsen during the spring of 2020, stock markets continued to rise. Historically, stock market returns in the economy have often been uncorrelated. In other words, when the economy goes down into recession, stock markets can rise, the exact opposite of what many feel will happen.
But Paul, it’s different this time. We have a war going on. That’s very true. Two years ago, an unexpected and unpredictable pandemic occurred. In 2008, an unanticipated financial meltdown happened, and in 2000 we had an unexpected tech bubble. History and markets are an ongoing stream of unpredictable and unexpected events. I’m going to guess that there will be another significant yet unpredictable event that no one is thinking about yet in another few years.
3 Key Takeaways
- 1Panicking during market volatility by making changes to your portfolio will probably cost you money, and potentially a lot of money
- The economy and the stock market do not always work in tandem. When one goes up, the other can go down [this happens frequently]
- Unexpected and unpredictable significant world events have always happened and will continue to happen
Losing weight is simple. Just eat less, but it’s not necessarily easy. The same can be said about being a disciplined and successful investor. Stick to your plan and avoid the temptation to panic.
Easier said than done.
PS. To be clear, I have no idea what’s going to happen with this horrible war or with markets for the balance of the year. We may end up in positive territory at year's end like we did in 2020, or we may not.
*The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation