You will likely see a slight uptick in the value of your account after last week’s correction of almost 13%, but this masks the extreme volatility of this week.
There were daily market moves of 1,000 points on average on the Dow Jones Industrial Average. This erratic market behavior was, of course, caused by the primary threat of the Coronavirus pandemic to the world and U.S. economies. Evidence of this is beginning to show up in airline stocks that are falling sharply as travel is greatly diminished in this environment. We have yet to see the full extent of the economic impact from this disruption, but it is clear that it will not be good.
In an effort to soften the effects this anticipated economic slowdown, the Federal Reserve Board preemptively lowered interest rates by a half percent earlier this week. Lowering interest rates is a key stimulus to most economic activity. This prompted a big one-day rally in the market, only to see these gains melt away in selling the following day. The market also moved sharply higher with the surprising wins of Joe Biden in the Super Tuesday Democratic primaries. The more moderate position of Biden relative to his more liberal/progressive opponents heartens the market, but the resulting gains also quickly vanished the following day.
The ongoing market volatility illustrates the near impossible task of predicting the next market move as the virus continues to spread throughout the globe. This is where looking back on long historical periods of time is particularly valuable. This is not the first time threats have perplexed and confused the markets. Over the past 20 years, many such threats have come and gone. During this time, the overall returns from the market have been impressive, despite market storms like we are experiencing now. Importantly, it is usually not a slow gradual recovery, but sharp and sudden moves higher that produce most of the gains.
Our blog writer and economist, Charles Couch, recently cited this interesting historical perspective. “For example, from 1999 through 2018, a $10,000 investment in the S&P 500 would have grown to $29,845 (total return excluding fees), according to J.P. Morgan calculations. That gain, though, assumes you were invested throughout the whole 20-year period. Missing just the 10 best performing days for the market during this horizon would see your ending balance shrink to only $14,895. In fact, failing to participate in just the top 60 trading days would result in a final balance of $2,144, a 79 percent loss. For some investors, missing these few days out of the 5,031 that occurred during the two-decade sample seems more than possible since the largest gains in the market often occur during periods of heightened volatility that can shake out weak hands.”
Finally, it is difficult to weather the day-to-day stress of the market’s volatility, but patience is rewarded in the long run, especially for the 401(k) investor. You, the 401(k) investor are not only a long-term investor, but your regular pay-period-by-pay period contributions smooth out the rough effect of market volatility and reward you in the end.
Once again, thank you for your confidence. We are watching events very carefully on your behalf. Stay calm and stay invested but, most of all, stay healthy.