It’s Like Déjà Vu All Over Again

The late New York Yankees catcher Yogi Berra was known for his non-sensical quotes, or “Yogi-isms.” One of which, “It’s like déjà vu all over again,” seems an altogether appropriate way to describe the most recent stretch in the market.

We’ve been here before

The discovery in South Africa of a new Coronavirus strain called Omicron caused stocks, oil prices, and Treasury yields to fall over concerns that travel restrictions and potential new shutdowns could slow the recovery of the global economy. If this sounds eerily familiar, like déjà vu perhaps, it’s because it is. That is to say – we’ve been here before.

In 2021, there have been several days of big drops in the market even though stocks have enjoyed a fabulous year. Each time stocks plunged, it was for a different reason – the Delta variant, rising inflation, liquidity concerns about Evergrande (the large Chinese real estate company). And each time, stocks rebounded and soon reached new highs. Even going back to the early days of the pandemic in spring 2020, after stocks fell 30-40% in a five-week span and the world seemed to be teetering on a precipice, markets recovered just about as quickly as they declined.

By citing these examples, I don’t mean to sound flippant about this latest bout of market volatility. When markets drop, whether it be for a day or weeks on end, it can feel scary. And when you’re in the thick of the decline, it’s easy to believe there is no end in sight. But the fact is that markets have always recovered and always rewarded those who remained in their seats.

Perspective is important

When the Dow dropped 905 points the day after Thanksgiving, it was the worst day for the index this year. In fact, the weekend Wall Street Journal’s front-page headline read, “Dow Suffers Worst Day of 2021.” But let’s put things in perspective. The percentage drop in the Dow that day was a mere 2.5%. Compare that to Black Monday (October 19, 1987), when the Dow dropped 508 points that day – a percentage decline of a whopping 22.6%! Markets have come a long way since then.

Should you be concerned about the Omicron variant? I’ll leave that to the scientific and medical experts to determine. As for its impact on the economy and the markets, that too remains to be seen. When the Delta variant was discovered in India earlier this year and soon spread worldwide, the economy and markets generally shrugged off the news and continued to steam ahead. The unleashing of pent-up consumer demand led to strong GDP growth and fantastic corporate earnings, pushing stocks higher. Those two variables are still at play as we head full-on into the holiday shopping season. And while it is unfortunate to see temporary restrictions on travel to/from several southern African countries (especially for an avid traveler to Africa such as myself), for US air carriers at least, those destinations account for very few of their routes.

What should you do?

The simple answer is nothing. As I stated earlier, investors who remain disciplined in the face of market volatility are rewarded.

• Tax Loss Harvesting – Big dislocations in the market create opportunities to rebalance and to harvest tax losses – two things that BDF pays particular attention to in the management of your portfolio.

• Asset Allocation – Make sure that your asset allocation properly reflects your appetite for risk. When stocks are dropping, those same bonds that often appear boring become very nice counterbalances to the risk of stocks. For example, when stocks dropped the day after Thanksgiving, the 10-year Treasury yield fell from 1.64% to 1.48%. That may not seem like much, but it was a 10% drop in the benchmark yield in a single day. And when bond yields fall, bond prices rise, and bond returns increase.

There are a few certainties in the investment world. We know that diversification pays off, and successfully timing the market is futile. And we also know for certain that markets can drop at any time for any reason. However, bear in mind that on any given day, stocks are twice as likely to go up than to go down. For that reason alone, regardless of what impact, if any, Omicron has on the markets going forward, do remember that we’ve been here before. It is like déjà vu all over again.