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With the COVID-19 pandemic raging worldwide and the total case count surpassing one million worldwide, the stock market entered nearly total free-fall in March 2020.
Stock Market Freefall
The plunge began on Monday, March 9, with the largest point drop for the Dow Jones Industrial Average (DJIA) in recent history.
Shortly thereafter, on March 12 and March 16, there were two more record-setting point drops.
In total, these three days —which happened within the span of a single week—were three of the worst stock market point drops in U.S. history.
The cause of these stock market drops is global terror about the spread of COVID-19, plunging oil prices, and Federal and State mandates creating widespread business, school and event closures, among other factors.
Only two other days in U.S. history have had more dramatic single-day percentage falls.
One was Black Monday on Oct. 19, 1987 (22.6% single day decline) and the other was December 12, 1914 (23.52% single day decline).
$2.2 Trillion Stimulus Bill
Despite this massive market plunge, the U.S. stock market did rebound substantially in response to the $2.2. Trillion Stimulus Bill passed March 25th, 2020.
The S&P 500, which is a market index that tracks 500 large companies listed on stock exchanges in the U.S., recovered about 40% of the freefall that it took in early-to-mid March.
Designed to provide unprecedented economic relief, the stimulus bill will pay $1,200 to most Americans (the 83% whose adjusted gross income is under $75,000), plus an extra $500 per child under 17 years of age.
It also has more than $377 billion allocated to assist small businesses. And, it will automatically pause federal loan payments for a six-month period ending September 30, 2020.
Plus, the bill includes provisions limiting foreclosures on mortgages and evictions of renters. For example, it can allow for forbearance of a federally backed mortgage for up to 60 days, with a possible extension of four more periods of 30 days each, due to COVID-19 related hardship.
Despite this fear-based sell-off and the subsequent rebound, I don’t think the U.S. or the global stock market has hit bottom yet.
I think further stock price drops will happen as the prolonged scope of this outbreak takes its tolls on businesses and governments worldwide.
In my opinion, this economic recession is going to get much worse before it gets better, because the science of the COVID-19 virus (SARS-CoV-2) is complex.
Dealing with its impact on a global population of 7.2 billion human beings is going to take:
- Diagnostics
- Prevention
- Vaccine(s) – While COVID-19 appears to be a relatively slow mutating virus, it is an RNA virus that does have the potential to mutate
- Large-scale manufacture and administration of approved vaccine(s) to a global population of 7.2 billion people
- Treatments for patients who do contract COVID-19 and its related complications, such as respiratory and immune complications
What Should You Do with Your Stock Holdings?
If you want to get out of the stock market with only minimal losses, you could sell now while the markets have rebounded somewhat (at the time of this writing).
However, you will lock in losses if you sell, so you need to weight the pros against the cons.
On the other hand, if you sell now with a small loss, you’ll likely be able to buy back in at a lower price at some point in the next 6 months or so.
Thus, your decision to buy or hold should be driven by how closely you want to watch and time the market and your tolerance for risk.
Personally, I think the U.S. stock market will drop back down near its previous low reached on March 23, 2020. At some point, it will probably will go even lower. But, remember, this is not financial advice. I am simply making an educated guess based on the indicators that I see around us.
To keep your emotions of out your decision making, I would recommend that you either:
- Use a buy limit order to pick up shares of stocks, ETFs, or index funds at a specific price that makes sense to you (for example, the previous lows reached in March 2020).
- Or, you dollar cost average into the stock market over the next 12 months. Dollar cost averaging just means that you periodically buy a fixed dollar amount on a predetermined schedule, such as $100 every two weeks. Naturally, you’ll get to pick up more shares when prices are lower (a better value) and fewer when prices are higher (over-priced).
Or, if you want to take a hands off approach and don’t need your money for years, you could leave your investments untouched and ride out this entire economic cycle.
Of course, this last approach is for the disciplined investor, because it requires you not to get emotional and react out of fear for what is likely to be a several year period. To help with this, remember that while your stock values will be suppressed for a while, the only thing that impacts your life is the price of your assets at the time that you sell.
How to Play the Stock Market?
Instead of trying to figure out exactly which stocks to buy, most people would do well to play the stock market as a whole using low cost investment options.
For example, you could use ETFs that track the market, like the Vanguard S&P 500 ETF (VOO) or Vanguard Total World Stock ETF (VT). These ETFs have very low expense ratios of only 0.03% and 0.08%, respectively.
This is important, because the best performing investments are the ones with the lowest management costs. Historical data clearly shows that management fees eat away at your stock market gains, so keep them low at all times.
Plus, almost no one (not even the “pros”) ever outperforms the market, so you might as well track it.
While your decision to buy or sell is highly personal, what I can say is that the upside of this market slump is that if you have cash available and want to learn investing, you can now learn this skill with less downside and lower prices than only a few weeks ago.
What do you think will happen to the S&P 500 or the DOW? Let me know in the comments below.