April 6, 2020
I want to take a slightly positive viewpoint on this post because, despite the COVID-19 crisis, investors do have a reason to be hopeful.
Last month saw the market’s worst trading day since 1987, featuring a 12 percent drop in the S&P 500 index.
Given the increased volatility we’ve been experiencing for a while, that may seem a bit normal. But it’s not. That type of drop is incredibly rare.
The S&P 500 has only fallen more than 10 percent in a day three other times in history – “Black Monday” in 1987, and twice during the market collapse of 1929.
For investors, these are historic times and the key question is – what’s next? Well, nobody knows.
From 1950-2019, the S&P 500 fell 5 percent or more in a day 23 times. It’s happened six times so far in 2020.
At the very least, it seems we can expect more volatility, which is actually good news for stock buyers. See, since 1950, if you bought after these daily collapses and held the investment for a year, you turned a profit 83 percent of the time.
The market has returned about 7 percent per year since 1950. But buying after these huge dips leads to an even better performance – 17.7 percent a year later, on average.
Now, a jump of almost 18 percent doesn’t help people who lost 30 percent in one year. It also doesn’t mean much for those who don’t have the means to buy these dips (most people are fully invested already).
But I want to make clear that not everything is doom and gloom. The historical conditions are there to achieve gains.
Are these normal historical circumstances? That remains to be seen.
Nonetheless, in a steady stream of bad economic news, any glimmer of hope is welcome.