During this coronavirus-induced market crash, the stock market has fallen nearly 30% from its mid-February all-time high. At some point the marking down will cease and those who have been able to take advantage of the lower prices will be happy to have done so.
Yet, what I wanted to write about has more to do with my personal history with market panics. In my investing career, I can remember three other times when selling was clearly driven by blind panic. I’m not sure what the definition of panicked markets is, but I believe you know it when you’re in it. Like now!
1987 – Stock Market Crash
This was the epic with the largest single day percentage decline in history with the market falling over 22% in one day on what’s come to be known as “Black Monday”, on October 19, 1987. I had just turned 30 a few weeks before and was trading futures at the Board of Trade with my father at the time. We did not generally trade in stock market futures, but erroneously got a call with our clearing firm confirming we had xx contracts of what was basically the Dow futures at the time. It was a big position that would have suffered an unbearable loss, but fortunately they realized their mistake and we were off the hook. Nonetheless, I remember at the time the world was convinced that we were about to start the next Great Depression. We hadn’t really experienced anything like that kind of a stock decline since the October 29, 1929 Black Friday crash so it seemed to make sense that it would lead to a depression. Yet, for perhaps the first time, the Federal Reserve came to the rescue with sharply lower interest rates and much liquidity. Despite our worst fears, that selling crescendo pretty much put in place the bottom as panic selling often does. Ultimately, that bear market turned out to be a really quick, but severe, decline falling 34% from August 1987 through October 1987.
2000-2002 – Tech Mania Reset
When the Dot-Com mania blew up into the Dot-Bomb, the NASDAQ market absolutely collapsed, falling 80%! This decline probably speaks more to the mania preceding the bear market but, in the middle, we went through the horrors of the 9/11 terrorist attack. With flights grounded and the stock market closed, it felt somewhat like today in the sense that major institutions were shutting down temporarily. I boldface-italicize because it is important to remember that today’s closings will be temporary as well.
This bear market was much longer lasting 2-1/2 years from March 2000 through September 2002. Yet, by maintaining diversified portfolios, our clients weathered this period fairly well as we had not previously gotten caught up in the internet mania.
2007-2009 – The Great Financial Crisis
One of the newsletter writers whom we subscribe to renames this period the “Great Panic”. And indeed, with the fall of Lehman Brothers in September 2008, the nearly year-old bear market went into panic mode with the deepest and longest crisis period that I can recall. (The peak was actually a year earlier on October 9, 2007 – the exact day I signed to buy a house, borrowing the most money in my life … but that’s another story that if you read this it means Faith Charles did not edit it out). The selling from the September Lehman collapse through the March 9, 2009 bottom was relentless and the first time that I heard the term “Waterfall Decline”. The panic kept growing as fear of the global financial system collapsing was a huge concern. All in all, the S&P 500 Index (of arguably the 500 best companies in the world) fell a staggering 57%! In this uber-panic, diversification did not help nearly as much as in the tech bubble collapse but patience and discipline did.
2020-? – Coronavirus Panic
Now we are clearly experiencing another panic-induced bear market. The lightning speed of the now 30% decline (in the Dow Jones Industrials) has been breathtaking (and nauseating)! So, how might we learn from these past experiences and let them guide us to making good decisions today? A few observations:
- Panics Create Opportunities. Emotional selling driven by a desire to “get out at all costs” generates prices below actual values.
- Financial Plans Are the Buffers between Our Emotions and Our Portfolios. By staying disciplined and rebalancing back to our target allocations, we are doing the opposite of panicking and automatically buying low and selling high (relatively).
- Panics Always Feel Like There Is No End in Sight. Yet, panic-induced bear markets have always ended and the subsequent bull markets have moved to new all-time highs.
- Finally, from my painful experience, it is when I really feel nauseous that it must be time to buy. Are we there yet?
We’ve been through these crises before, and as painful as they feel during the panic, the previous crises inevitably ended and this one will as well.