Deep Dive Into A Correction

Summary

• Out of all the 2020 market predictions, nobody suspected a virus.
• The future can be unpredictable like that. But that's why a plan is so important.
• Your investment plan may not have foreseen what would hit the markets, but it should have prepared you for a hit of some kind.

Out of all the 2020 market predictions, nobody suspected a virus. The future can be unpredictable like that.

But that's why a plan is so important. Your investment plan may not have foreseen what would hit the markets, but it should have prepared you for a hit of some kind.

As we're finding out, Mr. Market can get wild at times. While the S&P 500 is down 10.8% from its 2020 high, it's only down 6.4% on the year. That brings it back to the same level it was at four months ago - November 2019.

If it feels worse, it's because the fall happened so quickly. Seven trading days, and a 12.8% decline, separate the February 19th high from the February 28th low.

And it's been highly volatile since. So far, March saw the S&P move: 4.6%, -2.8%, 4.2%, -3.4% over its first four consecutive trading days.

Of course, that only tells part of Mr. Market's story. What about the stocks inside the S&P 500? Just because the S&P is down doesn't mean every stock in the index is down (it's a convenient example of the benefits of diversification in times like these). Which happens to be the case YTD:

• 33 stocks or 6.5% of the index are up over 10% YTD.
• 146 stocks or 28.9% of the index have a positive return YTD.
• 293 stocks or 58% of the index are underperforming the index YTD.
• 108 stocks or 21.4% of the index are down over 20% YTD.
• The best return YTD: REGN at 31%.
• The worst return YTD: NCLH at -51%.
• The median return is -9%.
• 7 of the 10 biggest companies in the index have outperformed the index YTD (JPM, FB, and BRK.B underperformed).
• Travel related companies are getting hit hard (not really a surprise).

Note: A full list of the YTD returns (minus dividends) - as of mid-day 3/5/2020 - for each stock can be found below (IR and TT were left out of the list due to the recent spinoff). There are 505 stocks in the S&P 500.

What I'm not suggesting is that this is the bottom or that theses prices are right. When I ran this exercise a few years ago, it was to show how widely prices fluctuate in a year for even the biggest stocks.

Today is no different. The moves are just more exaggerated on a daily basis.

In a matter of two months, the market has repriced the S&P 500 companies somewhere in the range of +31% to -51% so far. The market believes some companies will be hit hard, others won't be impacted much if at all, and some will benefit.

Has the intrinsic value of those companies changed that drastically in such a short time? Are the companies you own still worth what you thought they were worth at the beginning of the year? Has the future earnings potential of those companies changed dramatically in two months? Is it a short-term change in earnings? Or will it have a long-term impact? Has the long-term earnings potential changed as much as the stock's price?

Those are the questions that need to be asked. None of the answers should have anything to do with guessing what the market will do next.

Markets move. Sometimes those moves are hard to stomach, just like the moves today. But history shows that the market overexaggerates the impact of surprise events before getting it right. Mr. Market comes back to his senses…eventually…because companies have a value and the market realizes that value in the long run. It just requires patience and time.

Last Call

• Marks Memo: Nobody Knows II - H. Marks
• Perspective - Albert Bridge Capital
• Who Cares What Mr. Market Thinks! - Brooklyn Investor
• Pandemics & Markets - Investor Amnesia
• Using Models to Stay Calm in Charged Situations - Farnam Street
• The Models That Won't Die - Klement on Investing
• Death, Taxes, and Three Other Inevitable Things - M. Housel
• Five Questions: The Future of Asset Management with Meb Faber - ValIdea
• Jim Chanos: Financial Frauds and Manias: Past, Present, Future (podcast) - Infinite Loops
• The Factor Archives: Value (podcast) - What Works on Wall Street

Original post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.