Stock markets, a pandemic and global anxiety

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What should investors do during market volatility

The global financial markets and economy have been shaken by the coronavirus pandemic. Some aspects of this rapidly-changing event have been unprecedented and the day-to-day volatility in the markets has been jarring to even the most experienced traders. Business across the country is grinding to a halt as health officials encourage citizens to drastically change their daily patterns and stay close to home.

History tells a story

The financial markets have faced many “unprecedented” events in the past, some relatively recently. From the stock market crash on Oct. 29, 1929; the languishing stock market of the early 1970s; the Black Monday Crash in Fall of 1987; the bursting technology bubble in 2001; and the 2008 Great Recession. In between were many minor events that seemed momentous at the time.

After each incident, financial markets (and the economy they reflect) found their footing and recovered. Not always quickly or smoothly, but eventually things returned to normal – even if that normal was different from the one that preceded the crisis. New industries rose up while old ones faded as the economy and its citizens demanded new products and ways of living. These events spawned creativity and new business models.

Avoid letting fear take over

Through the close of trading on March 16, 2020, the S&P 500 Index fell 29.5% taking market values back to December 2018 levels and effectively erasing all of the S&P 500’s 2019 gains1. Although we still don’t know when we’ll be in the clear, this isn’t the worst bear market we’ve endured as a nation.

So while this pandemic is new, we are in very familiar behavioral and psychological territory. Fear and anxiety are amplified when we are in a fearful group – now online more than in an actual crowd.

Over the past few weeks, I returned to a book I first read in the years following the collapse of the internet bubble, Robert Menschel’s “Markets, Mobs & Mayhem: A Modern Look at the Madness of Crowds.” It’s a reminder of the dangers of crowd psychology, which can work in both positive and negative directions in the financial markets.

Menschel chronicles events ranging from the Dutch Tulipmania in the early 17th century to mobs of teenage admirers storming the arrival of The Beatles in America in 1964. He implores readers – investors – to keep their wits about them when everyone else is losing theirs.

One of my favorite quotes from the book that speaks to this moment is attributed to essayist Henry David Thoreau, who observes: “The mass never comes up to the standard of its best member, but on the contrary degrades itself to a level with the lowest.”

Right now, the financial markets are driven by a mix of widespread uncertainty about the path of the virus, the duration and depth of the economic impact of our collective decision in favor of a recession over widespread infection, and the amplifying effects of algorithmic computer trading.

Crowds can also be forces for good. As states and municipalities react to actual and anticipated cases of COVID-19, tens of millions are curtailing their activities with the goal of “flattening the curve” to slow the spread of the disease. This crowd behavior will have economic consequences, but its aim is noble.

What should an investor do?

We cannot know the direction of the markets in the near-term, other than to expect disorienting volatility for some time. What we do know is that selling right now will most certainly lock in the losses of the past three weeks. We believe the better action is to talk with your investment consultant or planner to do what is best for your situation.

1 Wall Street Journal

Chad Horning, CIO

Author

Chad Horning, CFA®
Chief Investment Officer

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