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.