AXS Insights

Staying Calm When Volatility Goes Viral: A Historical Perspective

Investor confidence can be fragile in financial markets. It can evaporate in a split second. We saw that during the last week of February 2020 when a coronavirus-inspired stock market rout sparked Wall Street pandemonium. It caused the market to go from record highs to a correction in only six trading days, the quickest such whipsaw in over 70 years. In doing so, it also wiped out roughly $4 trillion in U.S. equities, and about $6 trillion in global equities, in the blink of an eye.

Amid the uncertainty, however, investors are reminded to try to stay cool and avoid panic, while applying a historical perspective to best evaluate the market environment and any potential impact on their portfolios.

Historic Extremities

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On one hand, the coronavirus market impact resulted in the Dow having its greatest single-day point decline ever, which shaved 4.4% off the S&P 500 in only one market session. On the other hand, such decline was only a fraction of the 8% downward spirals the market suffered in 2008. And, it pales in comparison even more to the 22% market plunge on Black Monday in 1987.

Another consideration for pause is the fact that, notwithstanding the heavy February 2020 losses, the S&P 500 has still quadrupled from its 2009 levels.

Epidemics and Equities

Many suggest that an even more analogous data set to employ in the evaluation of how the equity markets might respond to the coronavirus epidemic over a longer period is the 6-month and 12-month S&P 500 percentage change following the start of other epidemics throughout history. Notwithstanding significant then-current shocks to the market upon the outbreak of health epidemics, the S&P 500 historically has shown strength and resiliency over the months that follow.

In fact, as this table illustrates, following the onset of some of our greatest health and medical epidemics historically, the S&P 500 bounced back within six months by nearly 9% (positive in 11 of 12 instances), and continued rising approximately 13.6% in the corresponding 12-month period (positive in 9 of the 11 cases).

Looking Ahead

The past illustrates that markets are disposed to overreacting to health and medical scares, as well as to recession and geopolitical fears. In every case in which the S&P 500 dropped by 10% in four trading sessions, the broad-based equities index bounced and has always been up within one year. The average gain in the S&P 500 during those times has been over 25%.

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Source: Bloomberg as of 2/24/20. Month end numbers were used for the 6-month and 12-month percentage change figures.
*12-month data is not available for the June 2019 measles. Past performance is not a guarantee of future results. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investments. These returns were the result of certain market factors and events that may not be repeated in the future.

When historic extremes in selling pressure manifest, investors are urged to incorporate a historical perspective in their evaluation of the investment landscape and their portfolios. While one cannot call the bottom of the market with any certainty, the market’s historical bounce-backs suggest strong reason for investors to consider a time horizon of several months or more in assessing the market and any potential impact on their portfolios.

The S&P 500 Index is an unmanaged index of 500 stocks used to measure large cap US stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investments. These returns were the result of certain market factors and events that may not be repeated in the future.

This information is educational in nature and does not constitute investment advice. These views are subject to change at any time based on market and other conditions and no forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of any investment or trading intent. This content should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by AXS Investments or any third-party. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. AXS Investments does not provide tax or legal advice and the information herein should not be considered as such. AXS Investments disclaims any liability arising out of your use of the information contained herein. You should consult your legal or tax professional regarding your specific situation. All investing is subject to risk, including the possible loss of the money you invest. Alternative investments may not be suitable for all investors. 

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