The Market Reacts to the Uncertainty of COVID-19
We are certainly living during a unique time in our country. The health and safety of our families and the community at large will hopefully be a focus for all Americans. The voluntary and mandatory steps around personal distancing that are key to stem the increase in the number of COVID-19 cases will inevitably take a toll on our economy. The markets are reacting to that fact and are in real time attempting to price just how severely the shock to the economy will impact corporate earnings.
Bear Market: Re-Pricing for Earnings Uncertainty
The sell-off in stocks has a lot to do with the slowdown in economic activity related to COVID-19, but coming into 2020, the stock market was going to have to deal with weakening growth, high valuations, tightening liquidity and very bullish sentiment among investors following the 30% gains from last year.
Now that we are in a bear market, we must realize that nobody really knows when the market will bottom out. Typically bear markets last a little more than a year and reduce stock prices on average by approximately 31%. Since 1950, the range of bear market declines has been between -22% and -57%.
Common Trends of Previous Downturns
A feature of bear markets that challenges the emotions of all investors is that days, or periods of significant volatility are more common. During the financial crisis, which lasted from October of 2007 until March of 2009, there were 15 instances in which the stock market rallied 5% or more, and 4 instances of rallies of 10% or more.
Being Patient and Proactive
During bear market periods, volatility and fear can be overwhelming and the urge to sell out of stocks as the market declines can be compelling. However, our experience and research demonstrates that the selling out of stocks after a 30% decline has proven detrimental to long-term performance. Explained in the chart below, market recovery can be swift and being patient as well as proactive can pay off.
Your Partner
As your advisors, we believe that it is always important to allocate your investments with a firm understanding of your future needs. As the markets gyrate, we have proactive plans in place to execute portfolio rebalancing to enhance your long-term goal attainment. During this period of market stress, we will be making trades to rebalance portfolios, to incrementally add or reduce your risk exposures and to execute tax-loss harvesting maneuvers where appropriate.
