This has been a historic week for our country as well as the markets. The market’s decline this week was punctuated yesterday with the single worst day since the “Black Monday” crash of 1987 - the Dow Jones lost over 2,000 points.
This means that technically we are in a bear market with more than a 20% correction from recent and record highs achieved just a few weeks ago. The selling, especially yesterday, accelerated as precautions for containing the spread of the Coronavirus affected all businesses both big and small. Most visibly nearly all professional and college level sports have cancelled tournaments, suspended play or postponed seasons as the virus has surfaced among some players. Many schools and colleges are closing or switching to online for the near future. A travel ban from Europe will be in effect tonight. Airlines have reduced their domestic flights by about 40% as the traveling public is staying home. I personally travel for business at least one or two days per week but, now most of my trips are cancelled and/or being replaced with teleconferences.
This near “grinding to a halt” for some sectors of the economy or drastic slow-down of others likely indicates a recession in the next few months or quarters. This is what the market has priced in with the sharp sell-off this week. To offset the potential of a deep recession the Federal Reserve has lowered interest rates and provided liquidity to the markets, the Federal government and the Trump Administration are seeking to lower payroll taxes and help stimulate the economy. Most of these efforts have little immediate effect, but will accelerate an economic recovery once the virus begins to subside. Given the robust nature of the economy prior to the pandemic, most expect the recovery aided by the significant economic stimulus to be quick.
An old adage about the stock market is that it moves on “anticipation, not realization.” Therefore, the sell off of the last few weeks anticipates a recession. Probably, the sell off exaggerates the future risk, so when the anticipation changes from pessimism to optimism, the buying could be swift and sudden. That is why the most significant gains of the market are limited a very few trading days over the course of decades, as we talked about in last week’s email Express.
I know it is painful to see your account value fall sharply as it has this week. But, remember you are a long term investor. As you contribute paycheck-by-paycheck you are buffering the losses and buying at today’s lower prices. When the market recovery takes place, you will disproportionately benefit from your lower priced purchases in this depressed time. Patience will be rewarded.
Thank you for your confidence and entrusting with your 401k account. Wash your hands, drink lots of water and enjoy your weekend at home.