The Stock Market Teaches Everyone a Lesson Again
Here is a summary of the last few weeks and months:
The stock market hit an all-time high in February,
The country closed all non-essential activity to fight COVID-19 creating the sharpest economic downturn in history,
The stock market fell from its all-time high to a bear market in record time,
The Federal Reserve pumped trillions of dollars into the monetary system,
The government passed trillions of dollars of aid to help citizens survive during the crisis,
Protests and violence in response to police brutality brought an unease to cities all across the country just when they were reopening,
Stocks have recovered the bulk of their losses since February.
So, what lesson has the stock market taught us? Once again, it taught us that no one can predict what it will do. What’s an investor to think? Recommendations about selling stocks abounded, right after they declined over 30%. No one issued a buy signal on March 23rd before stocks had their biggest 50-day increase in history. Investors with a plan who stuck to their plan, as usual, got rewarded. Investors who panicked at the bottom (that’s always when people panic) lost out on a huge recovery. Investors with a plan likely included in their plan the concept that markets often have severe drops like the one that just occurred. If their plan didn’t include that idea, it wasn’t a realistic plan. Stocks offer good returns because these types of declines occur. Good planning expects uncertainty. The stock market guarantees that plan will get tested every now and again. If you were uncomfortable during the recent crisis and stuck with your plan, congratulations. But perhaps now that prices have recovered it is a good time to review your planning. Where the stock market is headed in the near term, no one knows. We can be certain, though, that it will teach us another lesson one day. Let’s hope we don’t forget this one.