Time to Drop?

June 25, 2020

The last four months have been one for the record books.  We witnessed a historic stock market drop of -34% in only 40 days.  And then, just 77 days later, we saw a historic surge in the market of 48%.  This swift recovery was a welcome relief for investors.  However, at the same time, it has given some the unsettling feeling of too much, too soon. Could another sharp drop be on the horizon?

To support this thinking, there is no shortage of concerns weighing on investors’ minds:

  • Will there be a second (or third, or fourth…) wave of COVID-19 cases?
  • Will there be another lockdown?
  • What does the ballooning national debt mean for our economy?
  • When will unemployment come down from historic highs?
  • What do the Federal Reserve’s unprecedented monetary policies mean for the future of our economy and markets?
  • Will the trade deal with China be on or off?

These concerns, and many more, are certainly cause for volatility. However, volatility doesn’t mean the market has nowhere to go but down.

Looking at the last 30 years, amazingly, no year ended up down as much as its largest decline for the year. In fact, while the average year saw a stock market drop of -13.5% at some point, the average year ended with gains of 9%.

Large pullbacks and volatility are a normal part of investing. It’s the risk that comes with the reward. Yes, this time may be different. After all, global pandemics don’t happen often and certainly have not happened in a global economy like we have today. But the exact facts of any decline are always “different this time.” If they weren’t, the market would have perfect predictive capabilities. Even so, from the chart below, the historic observation of declines holds true, even amidst these crazy times.

Source: Clearnomics, Standard & Poor’s


Whether another sudden decline occurs or not, be it tomorrow, in 6 months, in 2 years, or 10 years is not the question to ask. We know the answer. Yes, it will happen. A sound investment strategy simply needs to plan for that inevitability. You must have a long-term plan to navigate through the dark times.

No doubt, market drops are unnerving.  But by reacting to short-term events by deviating from your tailored allocation, jumping in and out of the market, you may be trading short-term relief at the expense of your long-term objectives.

As we have just faced in this market recovery and rings true throughout history, the best market days often follow the worst days. The only way to capture the benefit of those up days is to be exposed to the market.  These up days are crucial, not only recovering from losses but to succeeding in living a full life.

We cannot ignore the fact that we are in unprecedented times on so many levels. And maybe this time will be different from all others.  But there is little doubt that full recoveries eventually happen. We just don’t know when. But you don’t need to know exactly when. Eventually, if you zoom out over your investment horizon, even this nasty market movement of the pandemic is just part of the story of long-term investment gain (see chart below). As the saying goes, time heals all wounds, and that is true in the market too.

Source: Standard and Poor’s @2020 Clearnomics Inc.

Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk.  Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices.  Historical indices do not reflect the deduction of transaction, custodial, investment management fees or fund fees which would diminish results.  Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data.  BDF clients must, in writing, advise BDF of personal, financial or investment objective changes and any restrictions desired on BDF’s services so that BDF may re-evaluate its previous recommendations and adjust its investment advisory services.  BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from BDF.

The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.