News & Notes: Dow Loses 1,000+ Points Yesterday, Double the Loss of Black Monday!

John Fischer, CFA®, CFP® | Chief Investment Officer

February 28, 2020

*This article is about a virus, but it does not contain a virus.*

Concerns about the spread of the Coronavirus and its impact to global economic growth caused both the Dow & S&P 500 to fall by more than 3% yesterday. How quickly luck can change as we saw new market highs last Wednesday with gains of more than 4% year-to-date only to see 2020 gains wiped away with yesterday’s losses. Here’s some thoughts on the markets and the Coronavirus.

Click Bait and the Rule of Large Numbers – Markets hit new highs on a regular basis and with new highs come the potential for increased fear mongering by media outlets over absolute changes in the indices, such as:

• Dow loses 1,000+ points yesterday, double the loss of Black Monday! – The Dow fell by 3.5% yesterday, it fell by 22% on Black Monday in 1987.
• Dow plunges 1,000+ points. – Straight from TV headlines yesterday – why aren’t S&P losses flashed in the same manner? Because losing 111 points on the S&P doesn’t drive fear, emotion, and viewer’s eyeballs like losing 1,000 points. Knowing what the media is trying to do can help investors maintain perspective and not take the bait.
• Losing 1,031 points, the Dow suffered its 3rd largest point loss in history yesterday. – At 3.5%, it doesn’t even come close to the top 20 largest percentage declines in history (#20 was down 6.91%). Since 1985, there have been 55 one day declines larger than yesterday.1
• The Dow suffered its largest decline yesterday since 2018. – Does that make yesterday’s losses significant or the unusual market calm of the past year more notable?

Higher Volatility is not High Volatility – There’s a big difference between the two – turn the jacuzzi bubbles on to get bigger waves, stare down a tsunami to understand a BIG wave. In the past 20 years, the Dow has fallen by 3+% in a single day on average 3 times a year.2 It only happened once in 2019 and yesterday was the first time in 2020. The volatility we saw yesterday is higher than what we’ve seen in some time but it shouldn’t be confused with high or abnormal volatility.

3 Pullbacks and a Correction – On average, we see 3 pullbacks of 5% and 1 correction of 10% each year. In 2019, we saw 2 pullbacks of 5% (twice at 6%) and no 10% corrections. After yesterday’s losses, we’ve had our first 5% pullback in 6 months and first of 2020. Given how calm the markets have been since the beginning of 2019, yesterday’s losses may have felt more extreme to investors. Viewing yesterday’s activity through a longer-term lens can offer investors some much needed perspective.

The Coronavirus – As the virus continues to spread, it puts additional pressure on the economy in the short-term, which affects the markets. The spread of the virus has hindered travel in many countries, which affects airlines, business supply chains, consumer spending, demand for oil, corporate profits and many more aspects of the economy. While it’s difficult to predict the economic impacts of viral pandemics, historically the effects have been relatively short-term. Back in 2003 when the SARS outbreak struck China, its death rate of 10% of those it infected was much higher than the current death rate of the Coronavirus of 3%.3 In the 6 months between the first reported SARS case and the final reported case, the S&P 500 experienced a max drawdown of less than 4%.

In my investment predictions for 2020, I encouraged investors to plan for higher volatility in 2020 given the extremely low levels of recent volatility, a presidential election year, and being in the later stages of the market cycle breeds higher volatility. The market never fails to surprise and while no one could have predicted this cause of higher volatility, now would be a good time for investors to look at their financial plan and evaluate if they own the right balance of stocks and bonds given the 10 year bull market run we’ve experienced. By focusing on your plan and not on the daily market headlines, investors can help maintain a long-term perspective.

Source: 1,2 Yahoo Finance, 3 World Health Organization

Make it a great day, John

Important Disclosures: The opinions or predictions voiced in this material are for general information only and should not be construed as personalized investment advice, including the recommendation to engage in a particular investment strategy. These predictions, alone, do not contain enough information to support an investment decision. Past performances referenced within may not be indicative of future results and may have been impacted by events and economic conditions that will not occur or prevail in the future. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.