Understanding the COVID-19 market chaos
Over the past five weeks, the hallmark of the U.S. stock market has been volatility. The turmoil began on Monday, Feb. 24, when the World Health Organization (WHO) reported the number of COVID-19 cases outside of China had jumped by nearly 50%. As history has proven, the report conveyed to the rest of the world this new virus was no longer just a Chinese problem.
The stock market’s response to the COVID-19 expansion was swift and severe. Within one week, the Dow Jones Industrial Average (DJIA) fell 12.4%. One month later, on March 23, the DJIA had fallen a massive 10,400 points, or 35.9%.
Adding to investor angst are the stock market’s monstrous daily point changes. From Monday, Feb. 24 through Thursday, March 26, the DJIA’s average daily change was 1,127 points. Within these 24 trading days, there were 11 1,000-point and three 2,000-point changes. In the third week of the COVID-19 market chaos, from March 9-13, the average daily change was a jaw-dropping 1,796 points.
The recent volatility is shattering records. Within seven trading days, from March 16-24, the DJIA reported its largest daily point decline (-2,997) and its largest daily point gain (2,112) in history. Eight of the 10 largest daily point declines and seven of the 10 largest daily point increases in the history of the DJIA have occurred since Feb. 24.
For home investors, this raises some obvious questions. First, why such a steep initial sell-off in the stock market? And second, what’s driving such intense volatility in daily price changes?
The COVID-19 decline is noticeably different from many other stock market pullbacks, including its most recent, the 2007-2009 global financial crisis. In many previous pullbacks, there was a small, initial sell-off. But after the initial sell-off, there was a slow, gradual decline in the stock market over the following months and years, until an eventual bottom was reached. In other words, the financial markets would wait for the latest economic data on consumer and business spending, manufacturing and the labor market, among others, to indicate further economic weakness to justify its continued sell-off in the stock market.
But the COVID-19 decline has been brutally hard and fast – far from slow and gradual. Instead, the financial markets are saying: We don’t need to wait for any economic data to tell us this virus will have a sudden and drastic impact on the U.S. and global economy.
Just how long this stock market volatility continues is ultimately dependent on how long this COVID-19 outbreak continues to escalate. But, keep in mind, the current volatility is from the financial markets trying to simply “estimate” the economic impact of this new virus. It won’t be until April that we start getting hard economic data that will start to actually “quantify” the impact on the U.S. economy. And once we do start getting that economic data – some good, some bad – it will continue to drive volatility in stock market prices.
Without question, the COVID-19 virus has shaken investor confidence. Simply saying “don’t panic” – though sound advice – does not always calm frayed nerves. Instead, let’s find comfort in historical data.
In the 94 years from 1926-2019, the S&P 500 stock index has had 11 bear markets – large, sustained declines in stock market prices. These 11 sell-offs have ranged in duration from three months to 2.8 years. Now, we don’t know how many days, weeks or months this current bear market will last. But over the past 94 years, after every single bear market, the stock market has rebounded and surged to new all-time highs.
Yes, the word “patience” may seem anecdotal. But that’s what will be needed to make it through this COVID-19 stock market sell-off.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
