COVID-19 has changed the landscape of our world. People become sick and some die. Countries have shut their borders. Shelter-in-place is mandatory. Businesses and Restaurants are forced to reduce hours or close. Schools are cancelled for the foreseeable future. We are certainly living in historic times.
No doubt you have seen the headlines of what will be historically viewed as one of quickest stock market plunges in history. More than 1/3rd of the DOW disappeared in less than 1 month. There is even a Wikipedia page to back all this up!
More than 1/3rd of the DOW disappeared in less than 1 month.
So what does this mean for the average American? Let’s start at the beginning:
- What does the stock market plunge mean?
- How does the stock market plunge affect me?
- What should I do because of this?
What does the stock market plunge mean?
From here on out when we talk about the stock market I mean either the DOW or S&P 500. The DOW and S&P 500 both track some of the largest companies on the New York Stock Exchange. You may have heard that the markets are “nervous” or “volatile”. Markets are considered nervous when there are large positive or negative swings in the stock market, typically indicated by the DOW or S&P 500.
Such a large swing means that the VIX is high. The VIX is referred to as the “fear index” and indicates how nervous day-traders are. With 0 being not nervous at all, while 100 means that the market is very volatile. The latest VIX high is 85.47 which is the highest it has been since the crash of 2008. Needless to say, day-traders and economists are nervous.
I am not going to get into the history of this pandemic as literally every other website has done so. Financially, this virus has shut down factories and restricted people’s movement. 18% of Americans have either lost their jobs or had their hours reduced due to this pandemic.
18% of Americans have either lost their jobs or had their hours reduced due to this pandemic.
The general feeling of job insecurity and fear is causing people to spend less. If you expected your company to close for a few weeks, the smart thing to do would be to pad your emergency fund.
This makes total sense! If hard times might come in the near future I will most likely not go out and buy a large ticket item or go on a vacation. For example, the auto industry is predicting an approximate 20% decrease in car sales from last year. This 20% expected drop closely matches the amount of people whose job is being impacted by this virus.
How does the stock market plunge affect me?
In two words, “not much”.
To be clear, the things that have partially caused the stock market plunge have affected you. Almost every person in the world is feeling the impact of COVID-19. Yet we are looking specifically at how the stock market plunge has affected you and your finances. You may have lost your job or had your hours reduced, but that is not due directly to the stock market going down.
A dip is natural after a bull market (a 20% increase from a past low) and is indicative of a healthy stock market in general. The stock market has lost about 36% of its value in the span of just over a month. Scary? Yes. Unique? Not quite.
Let us consider the last three bull markets and their subsequent bear markets (a 20% drop from a past high):
1990 to 2000 – 417% Growth
2000 to 2002 – 49% Drop
2002 to 2007 – 102% Growth
2007 to 2009 – 57% Drop
2009 to Feb 2020 – 400% Growth
Feb 2020 to now – 36% Drop
The stock market has lost about 36% of its value in the span of just over a month. Scary? Yes. Unique? Not quite.
If you had invested $1,000.00 in the S&P 500 as of January 1990, that investment (at the publishing of this article) would be worth $10,958.15. An average growth of 8.2% during that time frame is very respectable. This number includes two past bear markets that have been steeper than what we have seen thus far.
As seen above, we still have quite aways to go before we surpass some of the worst drops in recent history. I want to stress that a lot of the issues you are facing today are because of COVID-19 and its effects. Your local government has not shut down restaurants because the stock market is down. Your local government has shut down restaurants because you can get yourself and others sick.
Remember what the stock market is made of: large and successful companies. Apple, Home Depot, or any other stock that you own still exists and exists to create a profit. I would be much more concerned if the companies in the stock market started declaring bankruptcy. There has been no indication as such.
I would be much more concerned if the companies in the stock market started declaring bankruptcy.
America is a resilient country and we have beaten similar market situations in the past. Avoid the sensationalism that is rampant in the news, stick to your investing strategy, and rest easy. With all the upheaval in our world today, how your retirement account is being affected should be the least of your concerns.
All of this serves to show you that what we are experiencing (in the stock market) is normal and similar to past trends. There is no reason to make apocalyptic predictions due to a 36% drop in your investment portfolio,
What should I do?
Don’t sell! You only lose money in the stock market when you sell. What you see on your Vanguard account or Etrade account is an unrealized loss. Would you jump off a roller coaster right after it crests the hill because you suddenly got scared? No. You ride it out. The same principle applies here.
You should live your life as normal. Stop hoarding supplies. Stop worrying. Continue to either pay off your debts or invest in your retirement account. If you expect to lose your job soon then stock up some cash for at least 3 months of living expenses then continue to invest as normal.
If you expect to lose your job soon then stock up some cash for at least 3 months of living expenses…
I can guarantee that the market will recover to where it was at the start of 2020. When will it happen? I have no idea. Yet what follows each dip in the market? A climb. I have no reason to believe that this one will be any different.
As I final note, do not lose heart. The last month has been a little scary and it is OK to be nervous. Yet remember, your hope is not in the stock market. Your hope is not in your retirement account.
Psalm 20: has been of great comfort to my wife and I these last few weeks: “Some trust in chariots and some in horses, but we trust in the name of the Lord our God.” No matter what the market does. No matter what crazy law or restriction comes on the news, I know that God sees it all and will see us through this.
Remember, don’t freak out, stick to your plan, stay safe, and don’t succumb to the hype.