The Broader Indexes Decline On Fear The Market Has Gotten Ahead of Itself
Thursday’s market selloff served as a reality check to some investors who had forgotten markets do not go straight up. The media pointed to the new spikes in Coronavirus cases as the reason; although certainly true, the markets were looking for a reason to put a pause to the recent rally. The selloff caused the Dow Jones Industrial Average to drop 6.89%, while the S&P 500 decreased by 5.89% and the NASDAQ Composite Index was down 5.26%.
Over the last week, we have seen some positive economic data with the monthly unemployment numbers coming in much better than most had anticipated. This week’s unemployment claims also were better than anticipated (1.5 million vs 1.6 million) and the continuing claims declined compared to last week.
Many states were opening their economies and things were looking bright for future economic growth. However, as discussed on previous Market Updates, current economic news does not drive market returns. The markets care about what is likely to happen 6 to 9 months from today and not necessarily what is happening today. Take for instance the selloff we witnessed from February 19th through March 23rd, when the S&P 500 dropped by 33.9%. The markets were anticipating really bad news in the future, and now that news is being reported, for the most part, the markets have shrugged off the data, and in some instances, we have seen strong days when poor economic data is being released.
The same is true on the opposite end, like what we saw on Thursday. The spike in COVID-19 cases caused some investors to rethink that things will be back to “normal” soon. However, we think the selloff was amplified because people were already questioning how fast the markets had recovered since the March low.
To illustrate how quickly the market had run up, we compared how long it took for the S&P 500 to gain 40% from the lows of the Great Recession, the Dot Com bubble, and the current rally. From the March 2009 Great Recession low, it took the S&P 500 92 trading days to reach a 40% return. The Dot Com bubble was much slower to recover and took 301 trading days before hitting the 40% mark. Compared to the recent rally, which took only 52 days to achieve that same 40% threshold.
Over the last 50 trading days, we have seen the market, for the most part, move straight up, even though there is still uncertainty surrounding how long it will take our economy to recover. In a healthy market, we would expect high volatility as market participants buy and sell to find price discovery, which leads to market equilibrium.
In our portfolios, we have approximately a 10 percent cash position as we understand that the market is expected to become more volatile. This will allow us to capitalize on bargains that may arise during this volatility. Investors with a sound financial plan and investment strategy should not panic on big down days, but rather look to find opportunities.