Market Recovery vs. the Headlines
May 12, 2020
Current headlines are announcing that the economic situation is worsening by the day (Monday, May 11th example on CNN: “The Economy is Plummeting”). On Friday, the April jobs report indicated that the coronavirus shutdown had precipitated the highest unemployment rate since the Great Depression. The market, on the other hand (as represented by the S&P 500), reached its lowest point back on March 23rd, where it was 34% below the peak it had reached little more than a month before on February 19th. Since that time, we’ve seen a slow but steady rebound in market values. As of the close of business on Friday, May 8th, the S&P 500 was down just 13.5% from its peak. Many of our clients have responded to this dichotomy between the worsening news and a rising market by asking “What is the market thinking?”
We would urge caution in responding too strongly to daily headlines. The market priced in a very pessimistic scenario back in March and has been seeking the light at the end of the tunnel ever since. Not to say we won’t have another decline before we get back to earlier levels, but just like in the financial crisis of 2008-2009, the headlines are not necessarily “news” to the market. Below is a wonderful chart from Vanguard that shows a similar split between the headlines and the market’s direction back then:
Source: Vanguard
We expect that the current market holds more potential volatility than the typical market, because so much of the future of this crisis is unpredictable. We encourage our investors to stick to target allocations and be prepared for a rocky couple of months if not more. As we showed in our publication, Recovery Periods Following Major Market Declines, historical averages suggest it will take us 2 ½ years to recover from a market decline that we saw at the beginning of the crisis, though nothing about this crisis feels like it has a historical precedent.
As always, if you have any questions about your portfolio or a change in your financial circumstances, please feel free to reach out to us at your earliest convenience.