The US stock markets are down roughly 7% over the past 3 trading days, giving up all the index gains we saw over the first month and a half of the new year. Most news outlets are reporting the cause as “renewed Coronavirus fears”. Remember-Journalists prescribe headlines to market action after watching its results. Headlines over the last 3 weeks read “traders shrug off CoronaVirus fears” before this week “Coronavirus fears return, Dow drops more than 1,800 points”.

1.       I’d like a second opinion on this selloff being a singular viral COVID-19 outbreak (the virus formerly known as Corona) story. After all, we’re talking about a stock market with a total market value of 30-40 Trillion dollars. This market, which has millions of participants (individual investors, mutual fund managers, hedge fund managers, foundations, endowments etc.), digests a ton of news every day to fairly value its companies. Earnings and economic growth have historically been a good long-term indicator of which direction stocks will move. Short term, investors have plenty of reasons to have a change of heart. A quick swab of recent events indicates the market could also be considering:

·         The Fed indicates another interest rate injection would be in vein

·         The growing Bernie Sanders “democratic socialism” campaign makes capitalists nauseous

·         Atrophy of corporate revenue growth

·         Unhealthy student loan debt loads

·         The 5 biggest tech companies being “overweight” in the index

You get the idea- there’s a lot at work in the markets.

2.       Corrections tend to be similar in percentage drop, but bigger numbers mean bigger moves. A 10% drop in the Dow was 1500 points in 2013… today a 10%-er would be 3000 points. While bigger numbers might be startling, percentage is what counts: it’s a truer measure of how much pain an equity portfolio feels.

I do think market drops seem more abrupt now. The rise of electronic trading, price triggers, algorithms and nearly free trade costs have reduced barriers to market trading and can exacerbate drawdowns quickly. The opposite is true as well. On the upside, recovery times seem briefer. The 19% drop in late 2018 ended within 3 months… the average bear market historically takes 12-18 months to bottom out.

The point is, while waiting on the sidelines may seem attractive, prices will likely recover before the headlines do. And missing out on recoveries can be horribly expensive for investors.

3.       History shows pullbacks have never been permanent. In fact, market events tend to be good entry points for those who are net savers. Our prior post READ HERE on viral outbreaks shows (counter intuitively) that markets have actually grown at above average rates over the year following an epidemic.

I’ll let the charts do the work from here: