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The Coronavirus Correction

28 February, 2020 by Matthew O'Brien, Ph.D. in Commentary

We don’t know what markets will do today–they’re down so far–but in the previous 6 days stocks, represented by the S&P 500 Index of large American companies, dropped 12.03%.  This is of course a big decline, but how far does this set investors back?  Well, to be precise, it sets us back about four months to October 2019.  Stocks performed strongly over the past four months, and now we’ve given those gains back.

It’s essential to keep facts such as this in center view when misleading commentary from journalists or politicians tempt investors to panic.  One thing to count on is that our polarized political climate and the degraded state of the news media will continue to produce plenty of such commentary.

Consider this widely-shared headline from yesterday, here from CNN:

This extraordinarily misleading assertion is technically true, but it obscures the fact that the Dow Jones Industrial Average point system doesn’t reflect the actual magnitude of changes in stock prices.  Stocks dropped about -4.5% yesterday; in the stock market crash of 1987, stocks dropped -22% in a single day.

If stocks end up declining a full 30% from their recent highs, consider that this would put prices back to where they were in the late spring of 2017.  A 40% decline would put us back to around the time Donald Trump was elected in 2016.  Such declines would be painful to suffer and nobody wants them to happen, but meditating on these numbers should give investors confidence to stay in the market.  It’s not possible to time the market reliably and to jump in and out; investors who get lucky once when they “go to cash,” almost always lose in the long run, because they fail to get back in to the market to benefit from recoveries.  History has shown that the bulk of recoveries come in a few very strong upmarket days.  Missing out on these days permanently impairs long-term growth of capital.