In January 2020 the stock market (as measured by the S&P 500 Index) was coming off a year with 30%+ gains that only fueled the question of when will the market correct. This common refrain we hear following a large upward move in the market was only amplified by the market’s continued rise through mid-February…February 10th to be exact.
This date marks the beginning of one of the fastest stock market declines in history. In just over a month’s time the stock market gave back 34% of its value. We all know what fueled the sharp move. It was not the actual pandemic of which this generation has never seen…but how investors reacted to it. Or shall we say, overreacted to it.
Emotions tend to take over during trying times, so the overreaction is understandable. For those who stayed invested, or even better, invested more, the reward was as remarkable as the decline itself. In the graphic above, you can clearly see the astronomical rebound most sectors experienced in the nine-month period through December 31, 2020. Overall, the stock market rose nearly 70% from its March low.
It is clear the lack of clarity in February and March destroyed lots of investor confidence. But, as the authorities started to wrap their mind around the pandemic, the Federal Reserve unleashed trillions of dollars into the economy, and a way out of this started to become clear (i.e., vaccines)… investors comfort continued to return resulting in an S&P 500 Index up 16%+ for the year.
2020 was a wild ride, but as we reflect on it, we wonder if it needed to be so volatile? With over two decades of experience, as industry veterans we are less impacted by short-term hysteria and more inclined to view any news with a long-term lens. Our conclusion was that the pandemic gave us the opportunity to purchase some really inexpensive stocks. Our playbook through our history shows we are most likely the ones buying stocks while others are running for the exits. But this time around it seems investors were running faster than ever. Why?
Look no further than the graphic to the right. This is from a paper titled Why Is All COVID-19 News Bad News? by the National Bureau of Economic Research. In summary, 91% of stories by U.S. major media outlets are negative in tone versus 54% for non-U.S. major sources. What’s most notable is that the negativity level never really declines for the U.S. media, even during historically positive
scientific developments. Stories of increasing COVID-19 cases outnumber stories of decreasing cases by a factor of 5.5 even during periods when new cases were declining. (Take a second and let that sink in!)
Common knowledge is that negative news sells better than positive news. Simply, it triggers so many more emotions (and quicker) than anything positive. Negativity also seems to linger. Therefore, the actions of media companies make perfect sense to us. If your business is to attract eyeballs to your material, you are going to ride that hot horse as long as you possibly can. We don’t blame the media for the over-extended stock market declines, as investors are in control of their own money, but it is clear they fuel the fire.
Note:Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. Chart(s) courtesy of Visual Capitalists and National Bureau of Economic Research.