The old Rudyard Kipling poem “If” begins, “If you can keep your head when all around you are losing theirs, and blaming it on you…” That seems like a pretty fair description of the situation today in the financial markets. The DJIA dropped more than 2,000 points (almost 8%), the S&P 500 fell almost 226 (7.6%), and other major indexes did much the same in the worst day on Wall Street since the 2008 financial crisis. Certainly not a day for the faint of heart.
As I’ve said several times in the last couple of weeks, though, it helps to remember some facts. First, the “off switch” that was tripped this morning when the S&P 500 dropped by 7% in the first hour of trading worked exactly as intended. Instituted by the SEC in 2012 because of the exponential growth in computer- and algorithm-driven program trading and the more rapid pricing swings that go with them, the circuit breaker allowed the markets to adjust to the high volume of activity and maintain liquidity. No one should be alarmed when these triggers are activated; they exist to maintain orderly markets in the face of unusual circumstances, and that’s exactly what they did today.
Second, we need to understand that market prices change constantly in response to new information. When the disagreements among the OPEC+ nations erupted into an all-out oil price war late Sunday, that information slammed into a market that was already anxious about the likelihood of economic disruption related to the coronavirus. The markets reacted by pricing in that new information and the additional uncertainties it created. As we know, the one thing the markets dislike most is uncertainty. What we saw on the exchanges today is a reminder of what always happens when the market’s collective “mind” is surprised by the unexpected. Efficient markets that operate as intended always respond this way. Sometimes the surprise is good and the markets go up, and sometimes the surprise is negative and the markets go down. But in both cases, the market is doing what it is designed to do: processing millions of individual buying and selling decisions in order to arrive at the most logical prices, given all the available knowledge.
Third, I need to say it again: panic is not a plan. And I need to add a corollary: neither is greed. I actually had a client call in today wanting to take a big personal loan so she could “buy into the market while it’s cheap.” While I admire her fortitude, I talked her down off the ledge. First, we don’t know if we’re at the bottom yet. Second, and most important, you should never make any investment decision—whether to buy or to sell—on the basis of emotion, no matter if that emotion is fear or greed. Adrenaline and the financial markets do not mix.
That said, if you are maintaining a properly diversified portfolio and you need to rebalance in favor of equities in order to maintain your proper asset mix, it may be a good time to buy. Purchasing stocks or stock funds at a 20% discount from recent highs will probably turn out to be a positive move in the medium- to long term. But you should not go “all in” on stocks, just as you should not sell everything in a panicked rush to the exits. Both instincts will prove counterproductive to your long-term financial health.
Finally, never forget that the markets go up and the markets go down. Historically, they have always gone up higher than they go down, though we don’t know how long it will take this time—or any other time. What we are seeing is an efficient market as it assimilates rapidly developing events. In these uncertain times—as in all times—the best advice I can give is the same advice I always give:
Stay Diversified, Stay YOUR Course!