There is no doubt about it, 2020 has been a volatile year. In times of turbulence, we often look at the current geopolitical or economic events and think that it should be easy to apply what’s going on around us to an accurate prediction of what the stock market will do. After all, the stock market is just the aggregate value of companies, right? Surely a global pandemic and subsequent shelter-in-place lockdown would have an obvious impact on the overall stock market.
Consider what happened. In late February, many voices in the government, media, and even within health organizations told us not to panic, that the spread would be able to be controlled, and that overall impact of the virus would be minor. The S&P 500 index responded by losing over 30% of its value in about a month, making it the fastest bear market in history.
Fast forward a month. The week of March 23rd, most states enacted shelter-in-place policies, sports were shut down, most non-essential stores and restaurants shut down, and basically our entire economy grinded to a halt with no obvious end in sight. Jobless claims, which during the financial crisis of 2009 peaked at 665,000, spiked at 3.3 Million. Total unemployment over the following month rose to levels not seen since the Great Depression. So what did the stock market do? The S&P 500 promptly gained about 30% over that month.
Why is it so hard to time the market? There are 3 contributing factors:
1.) It reacts extremely quickly. Whether it be the news from a single company, or a possible global pandemic, the market reacts almost instantaneously to any new information available.
2.) The market is forward looking. The value of companies depends on the next ten years of profits much more than the next ten days.
3.) Short-term movement can be predicated on herd behavior of people. As we saw with the great toilet paper shortage of 2020, people can be irrational.
As always, the best course of action is to invest for the long-term and ignore the short-term volatility.
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