Coronavirus and the Market
Monday was crazy and the rest of the week jumped in to say "Hold my Beer." Of all the events that could cause a 10+% pullback in the US Stock Market a virus originating in China wasn't on many lists.
Pundits and experts spend a lot of time talking about the Federal Reserve, National Debt, the elections, but this pullback teaches the great lesson is that Risk is what you don't see.
So what does this mean? A couple of thoughts and I'll link to other opinions for greater depth and context if you are interested.
First question is how the markets have reacted to fears of pandemic? Here is a chart that illustrates.
2. Pullbacks like this have happened before. Nick Maggiuilli, Data Scientist at Ritholtz Wealth Management says (here) a 6% pullback in two days has happened 34 times since 1950.
Here's Nick:
"Considering that there are 17,655 two-day trading sessions over this time period, we have only seen trading activity this severe (or worse) on 0.2% of all trading days, or once every 2 years, on average."
This illustrates that the overwhelming majority of trading days don't see this kind of activity. Its why its shocking.
Just as important as how often this happened, understanding what followed is crucial.
As discussed many times time in the market is more important that timing the market. You will see this in the following charts.
If you spend the next couple of days obsessing over what the market is doing you will drive yourself crazy as the next two charts illustrate. As you narrow your window for measurement your range of outcomes widens and the potential of locking in losses increases.
As this last chart shows you you are rewarded for being patient. Of all the 250 trading periods following the 6% drop only four failed to get back to the start point.
3. Times like this are a great opportunity to take inventory of two things. Your gut reaction to the market news.
If you are nervous you may be taking on too much risk.
If you aren't nervous you may not be taking on enough risk.
Thirdly if you don't have a clue about where you stand it may be a good time to gain that understanding.
If you fall into any of those three categories, LETS TAlK!
4. Most of the consumers of this post are still in their accumulation years which means time is still their greatest ally. That isn't license to fall asleep at the wheel at any point during the process, but it should slow our thinking down enough to take inventory of what decision if any needs to be made.
Of course as always... take the long view.
PK
Here are some additional links that may provide perspective.
https://www.pragcap.com/a-crisis-is-the-worst-time-to-learn-your-risk-tolerance/
https://awealthofcommonsense.com/2020/02/fear-and-influenza-how-viruses-spread/