Hopefully, I won’t be posting updates every other day, but it’s worth commenting on the market moves on Monday. This commentary is from LPL Research (edited for clarity by me).
The impact on global markets from the spread of COVID-19 worsened this past weekend as a price war between Saudi Arabia and Russia resulted in sharply declining oil prices.
This combination of events sent the market tumbling on Monday, and bouncing like a ping pong ball every since. We need to remember that it is fairly common for stocks to enter bear market territory, defined as a cumulative drop of 20% or more, without being in a recession. In fact, market drops are often times fueled more by fears of a recession than a recession itself.
While the outbreak is serious, and has eroded investor confidence, we should not lose sight of the countervailing forces in an otherwise nervous market. When stock prices fall significantly, markets are not only pricing in bad news, but also providing an attractive entry point for long-term investors. In addition, markets have built-in “shock absorbers,” since short-term negative news can actually lead to longer-term positive outcomes. For example, a sharp decline in oil prices will eventually result in lower gas costs and more money in the pockets of consumers.
One common market axiom is “the first cut is the deepest.” In this case, when bad news first breaks, markets immediately react intensively. But each additional piece of news becomes less impactful. In other words, the news doesn’t have to be good to lift stocks; it just has to be less bad. To apply this to what we are currently experiencing, historically in pandemics, stocks have usually begun to recover as the number of new diagnosed cases stabilizes, not necessarily even declines.
In times like these, our natural inclination can be to sell. We are wired to flee when a crisis hits. But if history is a guide, we know this difficult environment is temporary. Rampant volatility creates opportunities: we experienced this in 2008, 2011, 2016, and most recently, in December 2018. During volatile times, market prices disconnect from their underlying fundamentals. When this occurs, invariably the best decision for long-term investors has been to stay the course.
Although it can be difficult to focus on the long term, we believe this situation, in hindsight, will be seen as a unique opportunity. Envisioning a positive future isn’t easy right now. Those who sell in a market storm rarely notice when the storm clouds begin to lift. And, as investors, missing stock market rebounds is perhaps the biggest risk to achieving our long-term goals. We don’t know exactly when this market will find a bottom and reverse course. However, our confidence in long-term corporate fundamentals and prospects for the US economy is unwavering. We believe patience will be rewarded.
As always, please contact me with questions or concerns.