Stocks took another beating Thursday, with the S&P 500 price index falling -4.4% and bringing this pullback officially into correction territory.[i] Considering stocks were at record highs last Wednesday, this is a jarring, sudden move. Investors’ emotions are likely running high, and understandably so. There is nothing fun about a -12.0% decline in six trading days.[ii] But sharp plunges have a way of stimulating market history buffs. In the last hour, we have seen a bunch of tweets and headlines showing stocks’ biggest-ever short drops, sliced and diced various ways. You may have seen them too. Please do yourself a favor and tune them out.
Any ranking of “worst” drops is one thing and one thing only: trivia. Especially when the time periods are so short. Trivia is not a market driver. Nor is past performance. Stocks don’t care one whit that this is the worst five-day stretch since the depths of the eurozone debt crisis in 2011. A panic is a panic. Does it really matter that folks are freaking out about a potential pandemic as much as they panicked over tiny Greece and a US credit-rating downgrade?
Trying to glean any sort of meaning from a five-day move seems fruitless. As Ben Graham legendarily observed, stocks are a voting machine in the short term and a weighing machine in the long term. In our view, that is all you need to know. Sentiment wins in the short term, but fundamentals matter most over more meaningful stretches. The “why” and “how much” behind sentiment swings strike us far less important. The emotional swing itself is what matters. Market fundamentals likely didn’t change on a dime seven days ago. That isn’t how these things work. As another old adage says: Bull markets end with a whimper, not a bang.
Another problem with worst-stretch lists: The comparison points are inevitably ugly, with years like 2008 and 2001. Nobody wants to be invested in a year like that. Seeing now compared with then inevitably triggers the fight-or-flight response. If you are a “fighter” whose first impulse at times like this is to buy, then hats off to you. If you are like most people, and the “flight” instinct kicks in, then all these lists do is raise your risk of selling after a big decline and taking yourself out of the eventual rebound. There is no way to know when this drop will end or how much further it will fall. But no drop is permanent. Whether the rebound starts in days or weeks, whether it is fast or slow, if you have held on thus far, we think you ought to reap the good that comes with the bad. Corrections hurt your long-term returns only if you don’t participate in the rebounds that follow them. Selling may feel good at a time like this. But when you remove emotion from the equation, all it does is transform a market decline into an actual portfolio loss.
Instead of giving you a list of bad stretches and the returns that follow them, we will simply offer some perspective. Thursday’s drop puts US stocks back at mid-October levels. This week did not erase years of patience and grit. Plus, the world hasn’t fundamentally changed. There is a lot of talk about sickness and death rates, but the numbers are actually smaller than typical annual influenza and pneumonia tallies. The global economy? Still mostly growing, according to the flash Purchasing Managers’ Indexes that surveyed businesses between February 12 and 20, when much of China was shuttered. The principal thing that has changed is the amount of fear in the air.
So tune out the apoplectic press coverage. Ignore trivial click-bait that only serves to heighten your pulse. Finish reading this article, and then shut your web browser. If you are in California, step outside and enjoy this gift of a warm sunny day. If you are still in winter, binge-watch The Office, Parks & Recreation, The Marvelous Mrs. Maisel or whatever your comfort-food show of choice is. Grab your favorite cookbook and whip up something tasty, taking time to revel in the meditative task of chopping vegetables. Bake cookies while listening to a comedy podcast and enjoy the sweet smell of caramelizing sugar. Light a candle and curl up with a good book. Knit. Cross stitch. Paint. Sketch. Garden. Clean. Distract yourself. Have a little fun.
Volatility cuts both ways. Good volatility follows bad. This is a bad stretch, but at some point, a good stretch will cancel it out. Better times await. Stay cool now to be ready for them.
[i] Source: FactSet, as of 2/27/2020. S&P 500 Index price return on 2/27/2020.
[ii] Ibid. S&P 500 price return, 2/19/2020 – 2/27/2020.