This market downturn is unlikely to match 2008

As published in the Minneapolis Star Tribune 03/13/2020.

Six trading days is all it took for the S&P 500 to fall 10% from its all-time high set Feb. 19, the fastest 10% correction in history. In less than a month, the Dow Jones industrial average lost 20%, officially entering a bear market.

It’s not just the size of this sell-off, but its speed, that has investors on edge. Before this year, the Dow had moved at least 1,000 points in a single day just three times (all in 2018). Since mid-February, it has happened nine times.

As is usually the case when stock prices plummet, investors are lamenting their failure to act before the market’s sudden change of course. But a global pandemic rightly lands in the realm of unpredictable events. If “Deadly virus outbreak linked to bats and snake meat” was in your 2020 market outlook, well, we would like to know your recommended lottery numbers.

Corrections and bear markets are an inevitable part of investing. Warren Buffett often reminds us that not only are corrections nothing to fear, he looks forward to them for the opportunities to purchase quality companies at cheaper prices.

Few investors command more respect than Buffett, whose perspectives are generally accepted as best practices. Yet it’s still human nature to throw common sense out the window when volatility strikes, stock prices sink and fear takes hold.

The biggest fear for many investors now is that this downturn could become another 2008. Such a scenario is extremely unlikely.

The S&P 500 fell nearly 40% in 2008 and 54% peak to trough from October 2007 through March 2009. Triggered by the greed associated with subprime mortgage-backed securities, the U.S. economy in 2008 was facing the potential collapse of its entire financial system and housing market.

Today, the risk is a contraction in global economic growth brought on by measures to contain a public health crisis. Even with a U.S. recession now likely, it won’t be nearly as severe as the Great Recession.

Make no mistake, the coronavirus pandemic is a big deal. For older Americans especially, we’re talking life and death. This is scary stuff.

In terms of headline risk, when deadly viruses meet 1,000-point market swings and the cancellation of professional sporting events, it’s understandable why panic becomes part of the daily equation driving equity (and bond) prices. This is where we remind ourselves that even in a worst case, the economic effect of COVID-19 will be temporary.

China, where the epidemic began, is already providing some encouraging signs. The number of new diagnoses there has begun to decline and many of the government-imposed quarantines and local travel restrictions have been loosened as patients previously diagnosed have recovered.

You might be surprised to know China’s stock market has outperformed U.S. equities since we first heard about coronavirus in late December. In the past month, Chinese equities have stabilized considerably, and their relative outperformance is even greater. That suggests two important things: There’s a light at the end of this dark economic tunnel, and U.S. equities may already be oversold.

The inability to quantify the economic impact of this crisis makes it impossible to say how far U.S. stocks should appropriately fall. That said, the S&P 500 has experienced 12 bear markets (down 20% or more) since World War II, and those have averaged a 30% decline in stock prices. If nothing else, you should feel confident we’re closer to the bottom than the top.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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