It’s A Matter of Perspective and Time

Mar 17, 2020 | Markets

Before launching into the stats, we want to take a moment to say we’re still watching everything. We’ve limited our time in office in favor of our work from home machines that we all installed in the last few months. We’re all still available via phone if you’d like to chat. Further, we’d like to really encourage everyone to take a minute to view the CDC guidance on how to defend yourself and your loved ones: https://www.cdc.gov/coronavirus/2019 – ncov/prepare/get – your – household – ready – for – COVID – 19.html. Please stay safe – you mean a lot to us.

 

At the time of writing this newsletter on March 16th, the S&P 500 Stock Index just experienced a  – 11.98% down day which is the worst since the crash of 1987 when it was down – 20.47% in a single day (10/19/1987). In ten trading days during October 1987 the S&P 500 Index went down 31.50%, whereas the current market is down 29.5%% in 18 trading days ending today March 16, 2020.

What does this mean and why does it happen?

There is the old saying that goes, “some things never change”. Yes, styles do change; cars and clothes are clearly not the same as they were 10 years ago, let alone 20 and 30 years ago. There are two constants that haven’t changed, nor do we suspect they will change in the future. These constants are the “predictability of human emotion” and the “unpredictability of the equity markets over the short term”. Humans instinctively avoid pain and seek pleasure. Will investors learn, and more importantly act on, the lessons the market has been teaching us the past nearly 100 years?

We invest for the long term, yet we seem to get derailed by short term events. This time it’s the Corona Virus but over the last 100 years there have been other historical occurrences that were arguably far more impactful in causing market volatility. Listed below is not a complete list of other momentous events that had an impact on the near – term volatility of the market. Yet, despite these events, the compound annual return of the S&P 500 Index since 1928 through December 31, 2019 is 9.78%.

1.       Great Depression – 1929

2.       World War II – 1938

3.       Pearl Harbor Attack – 1941

4.       Cuban Missile crisis – 1962

5.       President Kennedy assassination – 1963

6.       Arab Oil Embargo – 1973

7.       President Nixon Resigns – 1974

8.       Stock Market Crash – 1987

9.       Iraq invades Kuwait – 1990

10.   Tech Wreck – 2000

11.   World Trade Center attack – 2001

12.   Financial Meltdown – 2008

A couple of interesting facts about the timing of the 1987 Stock Market Crash and subsequent time in the market.  Listed below is the closing price of the S&P 500 Index on 10/5/1987 just prior to the big decline mentioned above in comparison to 5 and 10 years later.  Many investors panicked and got out of the market after October 19, 1987 to wait until things settled down, but how much did they miss in the rebound by making an emotional decision and not stay invested.  If you sell because you feel bad or can’t take the stress, when will you know when to get back in?

10/05/1987 – $328.08

10/19/1987 – $224.84    Drop of 31.5% in 10 trading days

10/05/1987   $328.08

10/05/1992   $418.34    Five years later representing 5% compounded annual return

10/05/1987   $328.08

11/5/1997     $942.76    Ten years later representing 11.13% compounded annual return

Lessons Learned:

We’re not trying to downplay the impact on the worldwide economy that the Coronavirus pandemic has caused and will continue to cause. It may even cause a business recession. But it too will pass and soon it will be all but a distant memory, just like the historical events mentioned above. We also need to remind ourselves that just a few years ago, in 2008, the banking system was near a complete collapse, yet it rebounded. Clearly, one of the blessings and curses of the information age we find ourselves in is the speed and availability of our news information.  Panic is never permanent, and as the virus ramps up, sentiment will turn higher as well.

Looking back, if we asked you the cause of the 1987 crash, would you be able to explain why it happened? Our guess is that in five to ten years, most investors won’t be able to articulate the reason for the current decline in the market. What they will remember, however, is how they felt during it: not good. The funny thing about the market though is that the “not good” feeling that violent down markets produce is generally followed by violent up markets while you’re still not feeling well about the downturn.

It is important for investors to understand that long term wealth comes most consistently with a long-term strategy of having a diversified portfolio. The volatility in the market caused by these short-term events, is the emotional price investors pay to build long term wealth.

Every day we learn more and every day we make progress.  This too shall pass.

Data Source: Yahoo finance

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