Updated: May 22, 2020
WHO just designated COVID-19 a global pandemic.
Markets throughout the world have experienced significant declines as a result of the virus; this past weekend a price war between Saudi Arabia and Russia brought sharp declines in oil prices. All this has challenged investors' ability to hold steady.
It’s important to remember that stocks periodically enter bear market territory, defined as a cumulative drop of 20% or more, without being in a recession. Markets can drop because of fears of a recession as much as the result of a recession itself. Let’s take a moment to remind ourselves not to lose sight of potentially positive forces amid an otherwise nerve-wracking market.
First, when stock prices fall, markets are pricing in bad news, but also providing an entry point for long-term investors. Second, markets have pulled back because of negative news but this can lead to positive outcomes in the long run. For example, lower oil prices mean lower gas prices at the pump which means more money in the pockets of consumers.
And both reports of the spread of COVID-19 and the price war over oil brought a quick and substantial drop in the markets in response to that news. Historically when responding to pandemics, stocks begin to recover as cases begins to stabilize.
The desire to sell is understandable. But it’s important to remember that volatility often creates opportunities. In 2008, 2011, 2016, and most recently at the end of 2018, long term investors benefitted from staying the course, especially in a pull back when prices are disconnected from underlying fundamentals.
It’s difficult to focus on the long term when markets drop so dramatically, but those who sell in a market storm rarely notice when the clouds begin to lift.
Think twice before moving to cash because missing those 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. Markets do not like fear or uncertainty and right now they have both. But we remain confident in the long-term fundamentals and prospects for the US economy and the ability for America to overcome this crisis. We are going to get through this. And markets generally reward patience.
Meanwhile, take the health crisis seriously. Wash your hands and stay healthy.
Contact Brixton Capital Wealth Advisors if you have any questions or concerns.