In mid-March, it was pretty clear to all that COVID-19 was going to be a disaster for many people and economies around the world. It has been exactly that, but the direction of the stock markets has not been as easy to predict.
March did turn out to be the most volatile month of all time and we saw the biggest monthly drop since October 2008 (the height of the Global Financial Crisis). Pessimism was at an extreme at the bottom of the decline with many holding out little hope for the near future of the stock markets. Yet, as deaths and unemployment continued to rise, April was the best month for the stock market since 1987.
It’s been an emotional roller coaster. Particularly during the worst of the March decline, factors like long-term prices, fundamentals, and rationality weren’t driving most people’s investment decisions. To justify their fear-based instincts, many convinced themselves that they “knew” that the situation was worse than everyone thought, that they “knew” the market would continue to go down in the next month, and that they’d get back in after further declines. But, as they’ve come to find out, they didn’t know. It was emotion that dictated decisions as people just wanted the pain to stop.
The investors who sold near the lows are now unsure whether to get back in with the markets higher and uncertainty and volatility still high. We see this experience as another in a long line of futile attempts by investors to try to predict market moves based on their feelings.
This is certainly not to say that the worst for stock markets is behind us. There could be another leg down and we could even reach new lows. It couldhappen, but it might not and we’ll only know in hindsight. What we do know is that the bottom tends to come at a time when things seem absolutely terrible. The above quote from investor and writer Doug Kass sums it up: “When it comes time to buy, you won’t want to.”