Thoughts on the Covid-19 Induced Stock Market Volatility

It’s hard not to think back to the financial crisis and resulting recession of 2007-2009 when watching the stock market volatility today. That was a painful period for many, especially those who were laid-off, small business owners, retirees, or those planning to retire soon. Actually, it was a pretty tough time for everyone for one reason or another. Afterward, it took years to fix the damage to the financial system and the economy, but the economy did recover.

The Current Market

The current market volatility is unprecedented, but we know the cause. Markets (meaning investors who buy stocks) hate uncertainty and uncertainty exists on many fronts right now. We don’t yet know the answers to questions such as:

When will the rate of infection slow down?
How long will it take to develop a vaccine?
How long will we have to shelter in place?
How long will restaurants, bars, retail stores, and other businesses stay closed?
How will reduced sales affect the profits of companies and their stock prices?
And many more.

It is logical that the volatility will subside once we have answers to these questions. And, our new reality of elbow bumping, hand-washing, social distancing, shelter-in-place, work-at-home practices will undoubtedly help to slow the spread and give experts time to develop a vaccine.

Unfortunately, the wait and this new way of life will come at a cost. The decline in economic activity of all types will most likely lead to a recession if we aren’t in one already. Recessions are painful but they do end and so will this one.

The below chart illustrates past world epidemics and global stock market performance. The MSCI World Index includes the U.S. and worldwide stock markets. You can see that recoveries from bear markets are swift in most cases:

You might wonder whether it makes sense to sell now and get back into the market later. But stock market history has shown that missing out on even a few days of positive market returns can derail this strategy as illustrated in the chart below.

The best course of action right now is to take a deep breath and wait this out. Better times are surely ahead.
Chart from VanguardFurther reading:  Freaked Out by the Stock Market? Take a Deep Breath