What Investors Need To Know About The Recent Selloff
Summary
- As of market close on March 2, 2020, the S&P 500 is down around 9% from recent highs, with several domestic and international indices in correction territory.
- The S&P 500 was up over 14% six months after the SARS epidemic in 2003 and 10% six months after MERS in 2012.
- While short-term movements can be gut-wrenching, the S&P 500 has delivered a positive return over every 20-year time frame since 1926.
*Note: Article originally published on Tuesday, February 25 with updates made on February 27 and March 2.
As of market close on March 2, 2020, the S&P 500 is down around 9% from recent highs, with several domestic and international indices in correction territory. Markets did jump significantly Monday amid hopes for global policy stimulus and a general sense that last week's selling was overdone. Still, coronavirus uncertainties remain elevated as outbreaks in Italy, Korea, and Iran intensify, while new clusters continue to pop up across the globe. The CDC has confirmed nearly 100 cases in the United States, and six have died from the virus thus far.
We often say that volatility is the price investors pay for long-term gains. But it doesn't make it any easier to stomach when markets are down double digits and the headlines are increasingly frightening. Luckily, history is on our side. The S&P 500 was up over 250% last decade despite averaging an intra-year drop of 10% (see chart). Daily plunges are also common - the market experiences an average of five 2%+ drops per year. Even healthy, upward-trending markets are prone to fits of volatility, particularly when uncertainty is high.
S&P 500 Annual Returns and Maximum Intra-Year Losses
Source: Standard & Poor's, Baird analysis. The S&P 500, computed by the Standard & Poor's Corporation, is a well-known gauge of stock market movements determined by the weighted capitalization of the 500 leading U.S. common stocks. Intra-year losses are calculated as the largest point-to-point loss in a given year, calculated on a weekly basis. Indices are unmanaged and are not available for direct investment. Past performance is not a guarantee of future results.
And uncertainty is surely elevated right now. In our recent piece "Look Beyond the Headlines: The Coronavirus," the Baird Investment Strategy team notes that markets tend to act impulsively in the face of an unexpected public health crisis, particularly one originating in a foreign country. But history is on our side once again. The piece goes on to note that stocks have responded well once the initial shock of an outbreak has subsided. The S&P 500 was up over 14% six months after the SARS epidemic in 2003 and 10% six months after MERS in 2012. The risks associated with this outbreak are very real, but looking to history can help provide context.
Further, the coronavirus volatility gives us an opportunity to reflect on the tenets of long-term investing. While steep and rapid market drops can be scary, trying to time the market is a nearly impossible task (see: The Difficulty in Calling a Market Top). Remember, you must be present to win the long-term game. And while short-term movements can be gut-wrenching, the S&P 500 has delivered a positive return over every 20-year time frame since 1926.
History is littered with risks: world wars, political uncertainty, natural disasters, and financial crises. And yet the market soldiers on. We do not aim to downplay the risks associated with the coronavirus, particularly given the large human toll exerted thus far. But short-term volatility should not affect one's long-term plan.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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