Sensible Perspectives

Recent Stock Market Performance in Context

Posted by on March 16, 2020

The stock market has been quite volatile in the last month. There has been considerable investor uncertainty associated with the novel coronavirus and COVID-19.

Historical perspective

The chart shows the performance of the S&P 500, adjusted for inflation using the US Consumer Price Index (CPI) since the beginning of 1926 (when the Standard Statistics Company began daily computation). I’ve used a logarithmic scale so that similar percentage movements have similar sizes on the chart (for example, while the recent 500-point decline in the S&P 500 is among the largest in history, it is far from the largest percentage of decline).

The recent net decline (approximately 16% since the beginning of 2020, through the sharp recovery on Friday, March 13, 2020 – the most recent close as of this writing) has not been as large as several of the most notable declines, although this market event is by no means over. Among others, the chart highlights the Great Crash of 1929, associated with the beginning of the Great Depression, the dark days of World War II from Pearl Harbor to the Battle of Midway, the Arab Oil Embargo, when gas prices quadrupled (imagine gas jumping to $10 or more per gallon today!), and the market decline from 2007-2009 associated with the Great Financial Crisis (GFC).

Investors, look to your portfolios

Investors are ultimately concerned with the percentage change in their portfolios rather than an arbitrary point decline in an index. To see this, imagine a “Grand S&P 500 Index” which is 1000 times the S&P 500 index. A 500-point decline in the S&P 500 from a starting point of 3200 would become a 500,000 (!) point decline in the Grand S&P 500 Index, which sounds downright terrifying, until we realize that it is from a starting point of 3,200,000. Both are about 16%, the number that really matters.

We do not know if the market will decline further (I would not be surprised if it did), how far it will ultimately fall, and when (or whether) it will recover. My point is simply that the stock market reaction to the COVID-19 crisis is not unexpected, is certainly not unprecedented, and is not an indication, in and of itself, of a fundamental change in stock market risk or return potential.

As usual, I would suggest that investors consider changes in their investment posture based on changes in their personal circumstances (which they understand very well) rather than based on their feelings about the stock market and its future direction (which is unpredictable).