• Pierre Fournier

A Year Since the Coronavirus Crash

By Professor Pierre Fournier

Looking at the stock market, you'd never know that a year ago last week was the Coronavirus Crash.

March 16, 2020, was the day Covid got very real for market investors. It was the week everyone realized that we would be in for a prolonged shutdown.

When the S&P 500 fell 7% shortly after the open, circuit breakers kicked in and halted trading for 15 minutes. It was the third circuit breaker halt in a week, after similar halts on March 9 and 12.

The Dow industrials dropped 12.9%, the second-biggest percentage loss post-WWII (after 1987′s 22.6% drop). The S&P 500 dropped 12%, its third-biggest percentage loss. The Nasdaq dropped 12.3%, its largest percentage loss ever.

The S&P 500 would not bottom until March 23, a week later. From Feb. 19, 2020, high to the March 23 bottom, the S&P would decline about 34%.

Then, almost as quickly, the market reversed. By August, the S&P was back to its old highs.

It's undeniable the world economy has endured a year like no other. The world economy suffered its worst contraction on record and remains deep in a labour market crisis, but Wall Street has staged a stunning recovery. The Dow Jones Industrial Average is up 39% over the past 12 months, buoyed by a steady flow of support from the Federal Reserve, and unprecedented progress on vaccines.

It doesn't pay to bet against stocks

Market crashes have become something of a rite of spring in financial history. But looking back at some of the biggest panics in recent memory, one thing remains clear: it doesn't pay to bet against stocks.

Flashback: 2009

Rewind a dozen years to another March panic that topped the headlines: This month in 2009 marked the bottom of the crash that triggered the Great Recession.

The reasons were very different: Financial engineering of subprime mortgages tanked the entire real estate market. Investment banks were brought to their knees and the global economy teetered. Governments and central banks around the world raced to control the fallout. But again green shoots sprouted. Since that March 2009 panic, the S&P 500 is up 482%. (as of last week close).

The dot-com bubble

Rewind even further to the dot-com bubble at the turn of the last century. In the late 1990s, a speculative frenzy gripped the stock prices of internet-related companies with no track records, no earnings, and barely a business plan.

By March 2000 the Nasdaq market index had soared 400% in five short years and hit a peak at 5,048. That was the end. The tech bubble burst and Nasdaq unravelled for years, hitting a low of just 1,114 in 2002. Today, the Nasdaq is above 13,000.

Better Long-Term Returns

Many market experts recommend holding stocks for the long-term. An examination of several decades of historical asset class returns shows that stocks have outperformed almost all other asset classes. Using the period from 1928 to 2020, the S&P 500 returned an average of 10% per year. This compares favourably to the 3.5% return of three-month Treasury bills and the 5% return of 10-year Treasury notes.

Even considering setbacks, such as the Great Depression, the tech bubble, and the financial crisis, investors would have experienced gains had they made an investment in the S&P 500 and held it uninterrupted for 20+ years. While past results are no guarantee of future returns, it does suggest that long-term investing in stocks generally yields positive results, if given enough time.

Investors Are Poor Market Timers

One of the inherent flaws in investor behaviour is the tendency to be emotional. Many individuals claim to be long-term investors up until the stock market begins falling, which is when they tend to withdraw money for fear of additional losses.

Many of these same investors fail to be invested in stocks when a rebound occurs, and jump back in only when most of the gains have already been achieved. This type of "buy high, sell low" behaviour tends to cripple investor returns.

The problem with making decisions based on short-term moves is that they don’t work. No one knows what a stock is going to do in the next week or month. What investors fancy now may be passé next month. Conversely, something that’s not working for you may, out of nowhere, go mainstream.

But the bigger question is, do you care? If you own companies that are growing their earnings and dividends year after year and are trading at valuations that make sense, why does it matter if they’re in vogue or not? When the stock of a good company is flat or down for an extended period, it’s like a spring that’s being gradually compressed. It will eventually pop. In the meantime, you get a chance to buy it fully loaded.

Investors who pay too much attention to the stock market tend to handicap their chances of success by trying to time the market too frequently. A simple long-term buy-and-hold strategy would have yielded far better results.

Disclaimer: This article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making an investment based on your own personal circumstances.

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