On January 27th, Vanguard, one of the largest and most well-respected investment firms in the country posted an article about the possibility of a market downturn. It was written for advisors as its direct audience. The article included great information to share with our clients when a market downturn occurred. Because the stock market has had one of the longest positive runs in its history, seeing articles like this were not uncommon at the time.
On January 2, 2020, the Dow Jones opened the new year at $28,638.97 and continued its dramatic growth when it hit an intra-day high of $29,373.02 on January 17. The gain was just over $700. On January 27, when the article was posted, the Dow closed at $28,535.80. This was an $800 drop in just five trading days. But over the next two weeks, the market grew back to an even higher point than mid-January. On February 13, the market hit another intra-day high of $29.535.40. Since then, it has been a very different story. As of the close of trading Friday, February 28, the Dow closed at $25.409.36. That is a drop of $4,126 in 10 trading days, which equates to roughly 14%!
Unless you have missed the daily news the Coronavirus, has now spread to the U.S., and caused the stock market to go on an elevator ride almost straight downward. For many, this has caused fear because it has been very hard and fast.
Without surprise, I have had a handful of calls, emails, and texts with a range of emotions on what, if any, changes should be made as a result of the recent events.
To keep things in perspective, I have included some facts to consider:
During a rapid decrease in the market, I agree that it can be very hard not to have some strong emotions. But I believe that when we understand the changes in a broader context, it may help us respond differently. Some may remember the decline in the stock market, the last quarter of 2018.
On October 1, 2018, the Dow Jones opened the day at $26,598.36. By December 24, 2018, the market had bottomed to $21,792.20. That was a drop of $4,806. This was about an 18% pullback. Do those numbers look close to the numbers from the last two weeks? Ironically, it is almost $700 larger, and about 4% larger. But, unlike an escalator that takes a little longer to get where it is going, an elevator only knows straight up and straight down. When it comes down fast, we feel it much differently.
From December 24, 2018, through December 31, 2019, the Dow Jones grew from $21,792.20 to $28,868.80. This was roughly a 32% increase in just over 12 months! Although we would have loved this to continue without interruption, history tells us it was bound to change.
The data I have shared so far would be considered short-term. The stock market can be and is VERY volatile in the short-term. When we take a step back and understand what our goals are long-term and knowing that the market traditionally grows over the long term, I will share a few final numbers for consideration.
On March 9, 2009, the Dow Jones hit its lowest point during the Great Recession. I too can still vividly remember becoming very scared at this time, as the stock market continued to drop and drop. On that day, the Dow Jones was at $6,547. Between October 11, 2007, and March 9, 2009, the stock market had had its biggest drop since the 1930s! Since that time, those investors that have kept their long-term focus stayed in the market, and continued to invest regularly have been immensely rewarded.
When we were in the midst of the Great Recession, I heard many stories about people who became too scared and sold all their investments for fear of losing more and more of their hard-earned savings. They justified their actions by saying they would wait for the market to settle down. Sadly, many of these same people never invested again.
When we watch what the market is doing on a day to day basis (short-term view), I don't believe it ever settles down. There is just TOO much noise. When we look over the longer term, it is dramatically quieter.
Moving forward, I cannot tell you when the market will find its footing. We may still have even more downward movement. We may not. But what I do know, is that those who are focused on the long-term goal who have over 8 to 10 + years, and are still accumulating for retirement, we were all just handed an opportunity to invest at prices 14% lower than before.