On February 12, there was some chatter and excitement about the possibility of the Dow Jones Industrial Average hitting 30,000 points, a feat that had never occurred. For investors, the time had never appeared better to put money into the market. Yet just over a month later, on March 23, the Dow Jones fell all the way to 18,000, as COVID-19 forced shutdowns and panic across the country and world. In just 40 short days, the stock market dropped almost 37%. Investors went from joy at the returns in their portfolios to sheer horror at seeing the losses that had now overtaken all their gains. The market had not been that low since November of 2016. In just over a month, the gains of three-and-a-half years had been wiped away like the snapping of two fingers. The natural reaction: panic. It is always easy to tell yourself not to panic during a crisis, but when the crisis hits, there is always an urge to follow the masses in reacting. Yet when it comes to the stock market, sometimes the best reaction is simply no reaction at all.
For the past 3 months, the stock market has come roaring back, reaching up to 27,400 points as of June 8. At this point, the Dow Jones is only 7% off its peak on February 12, and for the entire year of 2020, is only down 5%. According to Bloomberg, the S&P 500 index is up 43% since March 23 and is just less than 1% away from breaking even in 2020. Since that fateful day in March, every single company listed in the S&P 500 has posted a positive return, which is borderline remarkable.
So, what are all these flashy numbers and statistics supposed to show us? Is the country back to normal? Is the economy ready to boom? The stock market is impossible to predict, and whether it rises or falls is beyond one’s control. However, what is controllable is how we react to these situations, and panic is never a good reaction to any crisis, especially a financial one. It can be very tempting to sell when one sees his or her portfolio dropping in value 10%-15% in a short time frame, but as this current rebound proves, the market can be unpredictable, and the COVID-19 pandemic and related shutdowns only added more volatility to an already volatile market. While the common reaction to a crashing stock market is to “sell”, listening to your financial advisor can be key to avoiding this type of panicked reaction. Having a concrete investment strategy along with well-thought asset allocation can help you avoid the “panic” response that comes during troubling times, especially the unique situation the world faced back in February and March. What the stock market is telling us now is the importance of not overreacting to a crisis and the need to approach such crises with caution and prudence. Three months ago, there was absolute panic in the world of investors. Today, there is cautious optimism, plenty of looming light at the end of the waning tunnel, and for those who stayed steady and calm, the possibility of reaping the benefits of their foresight.