Caution: Panic Can Be Infectious

Feb 28, 2020

By Pete Biebel, Senior Vice President

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Don’t let this week’s market headlines strike panic.  If you consider percentages vs. points, the SARS virus and 9/11 triggered 12-13% corrections in the market and that is roughly the percentage pullback we’ve had to date.  We urge you to resist the urge to sell now.  We don’t know if the next news on the coronavirus will be positive i.e. things are getting under control or negative, i.e. death rates are increasing etc.…   Regardless, liquidating equity positions during volatile market conditions puts investors in the very precarious position of timing the market.  History has shown that average investors who panic and close-out positions usually will be afraid to make a timely return; they miss out on potential upside when the market rebounds.  Remain calm and think long term.

As we noted in our market commentary last Monday, “The markets can be callously ignorant of the number of fatalities in any given worldwide disaster, but when it starts to impact economic growth and corporate profits, the markets care deeply.”

We offer these thoughts on the market’s current state…

  • The stock market enjoyed an incredible rally in the final months of 2019 and the first six weeks of 2020.  Euphoria ruled the day; speculative excess was evident in option trading volumes and individual stocks.  The market was overdue for a timeout.
  • The coronavirus is something the markets were unable to anticipate; it was a shock to the markets.  The markets always face uncertainty, but there are almost always bounds to how good or how bad the news will be.  With coronavirus, no one knows how bad things might get or to what extent the contagion will impact worldwide commerce.  Until there’s some end in sight to the extent of the economic impact, the markets will probably price to the worst-case interpretation.
  • When the market is in a state of shock, fundamentals go out the window and technicals take over.
  • In recent years we’ve learned that with high-frequency traders, systematic traders and passive investing dominating market activity, when sell signals are triggered, we should expect air-pocket declines.
  • Most investors are just back to where they were in October.  So far, the averages have only given back what they gained over the past four or five months.  The S&P 500 Index spent most of 2018 and 2019 in the range between 2700 and 2900.
  • The worst is probably over.  We probably shouldn’t be in a rush to jump in with both feet but we’re probably not far from wanting to put a toe or two in the water.  Now is the time to begin working on a list of buy candidates.
  • We’re likely to   see a steep rebound over the next several days to recover a portion of the recent losses, but it won’t necessarily mean that the lows have been seen.  This week’s volatility has caused market depth to get very thin.  Volatile, wide-range days, both up and down, are likely to be the norm for another week or two.