Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2019, over which time period the average annual return was 8.9%.
The 08 - 09 financial crisis came from systemic bad practices within the financial system. Today, our banks are solid and the current situation is a result of an acute health crisis which, however dire, will pass.
The financial crisis was a period of great uncertainty where both the short- and long-term behavior of the market and the economy were complete mysteries and required systematic changes for years afterwards.
While the immediate future is relatively uncertain, it is fairly certain that within the next three to six months the situation will resolve itself
Uncertainty caused by new cases and no clear path forward creates market volatility
The current market distress is most directly related to the uncertainty surrounding the future of the coronavirus (and not underlying economic weakness). The best source of current information on the spread is Johns Hopkins, which provides an interactive world map of cases .
Below is their map of the current cases within the U.S. Each circle represents the amount of cases in a particular state.
In regards to the current number of confirmed cases, there has been an increase over the past week. This is could be due in part to the increases in testing.
It is also quite difficult to predict how the virus will fare in the next several months. There are multiple unknowns, such as how the virus responds to increased temperatures, and whether people who have survived the virus can contract it a second time. Again, these known unknowns will continue to create market volatility.
Uncertainty yields risk—which yields market volatility
Investors are largely responding to headlines. Instead of calmly determining the long-term risks of the current situation, investors are basing their trades on emotions instead of on the numbers. This has caused significant market volatility over the past weeks as each day brings different news from the day before.
This graph shows that the market has been experiencing significant gains and losses with seemingly no rhyme or reason. Just last week the Dow closed down 9.99% on one day, then on Friday of the same week the Dow also had one of its largest point gains ever, rising 9.3% in the last 30 minutes of trading. Then on Monday, March 16th there was 12.93% decrease, the second worst daily drop
Coronavirus has affected businesses and a technical recession may be coming
We may be headed into a recession, but it is likely that any recession we have would be short lived. January and February numbers were sound, and the banking system is also fundamentally sound, unlike in 2008. As a result, the data is showing that Q3 and Q4 would still emerge as positive quarters and remember that Stocks typically rise before a recovery.
Don’t sit it out, however tempting it may be
The golden rule of investing is to buy low and sell high. In theory, the strategy is fairly simple: purchase at low prices and sell at higher prices. Unfortunately, implementing the strategy is much more complicated because emotions and timing issues come into play. Attempting to time the market (by selling after a potential 30% loss), can cause you to miss out on the market’s best days which account for much of the market’s gains.
Looking back at the past the 20 years, an investor who remained invested for the entire time period would have accumulated $324,019, while an investor who missed just five of the top-performing days during that period would have accumulated only $214,950
The rebound will be coming before you know it
While the coronavirus has sent us into a bear market, it is important to remember that typically the market rebounds from epidemics quite quickly, particularly when, as here, the underlying fundamentals are strong to begin with. From the table below we can see that, despite any poor performance that initially occurred following outbreaks, stocks managed to experience gains typically within one year (and often sooner).
This is not the 2008–2009 financial crisis or anything close to it. The current fear of the market is the unknown, not structural instability.
A recession is not guaranteed, but if one does occur it should be short and nowhere near as damaging as the 2008–2009 financial crisis.
Lastly, remember not to get caught up in the immediate, but instead think long-term. This too shall pass.
The bull market appears to be over. The S&P 500 Index and the DJIA are down about 20% from their respective peaks.
The steep sell-off is being driven by the uncertainty created by the coronavirus, which was called a pandemic by the World Health Organization on Wednesday. Volatility is being exacerbated by algorithm-based trading programs that dominate the Wall Street.
We know that investors move to a risk-off posture when uncertainty rises. Today, the range of economic outcomes has substantially increased—all to the downside.
Yes, the economy was accelerating in February—strong job numbers, a rise in small business confidence, and a service sector that appears to be accelerating. The Atlanta Fed’s GDPNow model places Q1 growth at a strong 3.1% as of last Friday.
But the data survey occurred before COVID-19 swamped the economic landscape.
While important sectors of the economy are getting hurt, recent news has been cautiously encouraging.
Though layoffs may loom in the near future, Thursday’s first-time jobless claims report came in at a low level of 211,000, the U.S. MBA Purchase Index, a weekly review of mortgage apps for home purchases, was upbeat, and retail staples are flying off the shelf.
Goldman Sachs expects S&P 500 profits in 2020 to fall to $157/share versus its forecast two weeks ago of $165, when it backed away from its $174/share forecast. Analysts surveyed by Refinitiv see $173.30.
When a the economic landscape gets socked in by fog, investors can quickly get disoriented. We get that. How might we get rid of the fog?
The New York Fed announces a major injection of liquidity into the financial system on Thursday amid signs of disruptions in the bond market.
The Fed will offer at least $1.5 trillion in repo operations over the next couple of days, with one- to three-month settlements. It will also offer significant amounts of overnight cash.
The $60 billion in monthly T-bill buys will no longer be restricted to the short end of the curve.
The Fed said, “These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”
Monetary policy muscle can be used to help address liquidity issues.
New cases in South Korea appear to be plateauing—encouraging...
If you can believe the numbers, the same thing appears to be happening in China...
Despite the uncertainty and the sense that "it's different this time," we’ll get through this, and this too shall pass.
Wash your hands, don’t touch your face, follow health protocols, and please keep the age-old adage in mind. Panic is not a good strategy.
Social Security benefits will increase 1.6 percent in 2020. The 1.6 percent cost-of-living adjustment (COLA) will begin with benefits payable in January 2020. However, the Medicare Part B monthly premiums are also higher than the 2019 amounts. The standard monthly premium for Medicare Part B enrollees will be $144.60 for 2020, an increase of $9.10 or 6.72%; up from $135.50 in 2019.
The year 2019 served up many examples of the unpredictability of markets.
Interest rates that US policy makers expected to rise fell instead. American consumers’ confidence weakened as the year began1, and news headlines broadcast fears of an economic slowdown. But investors who moved onto the sidelines may have missed the gains in the US stock market. As of the end of October, the S&P 500 was up more than 20% for the year on a total-return basis. That puts it on course for the best showing since 2013 should that gain hold through December.
Outside the US, Greece—the site of an economic crisis so dire some expected the country to abandon the euro earlier this decade, and a country whose equity market lost more than a third of its value last year—has had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash.
Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors.
Up or Down?
A closer look at interest rates and the bond market shows just how unpredictable asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, policy makers lowered it three times.
In the market for US Treasuries—where market participants set interest rates—the yield curve that tracks Treasuries inverted for the first time in more than 10 years, as seen in Exhibit 1. Some long-term yields fell below some short-term yields over the summer. What’s more, yields on medium- and long-term bonds were at historically low levels at the start of the year, but they fell even lower by the end of October. Investors who made moves based on the expectation yields would rise in 2019 may have been disappointed in how events ultimately transpired.
Yields on US Treasuries of various maturities since the end of 2018
Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year, as Exhibit 2 shows.
Among the 23 developed market countries,2 only one country was a Top 5 performer for 2018 and 2019: the US. Last year’s strongest performing market— Finland—ranked 22nd this year through the end of October. Among emerging markets, Greece swung from a 37% decline last year to a 37% advance this year through the end of October.
Changes in the Ranks
Performance of equity markets in 23 developed and 24 emerging economies
History has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. Neither the mainstream prognostications nor the hindsight of recent strong performance predicted outcomes in 2019.
Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a wiser strategy may be to hold a range of investments that focus on systematic and robust drivers of potential returns. Investors who were broadly diversified across asset classes and around the globe were in a position to potentially enjoy the returns that the markets delivered thus far in 2019. Last year, this year, next year—that approach is a timeless one.
1Based on readings from the Conference Board Consumer Confidence Survey and the University of Michigan Index of Consumer Sentiment.
2Markets designated as developed or emerging by MSCI.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Investing risks include loss of principal and fluctuating value.
Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.