This Market is NOT Crazy

I originally wanted to title this, This Market WAS Predictable, but I worried the point would disappear in the predictability semantics. Did I know a pandemic would lead to a global economic shutdown and stocks dropping 35% faster than ever? Of course not, and I’m on record about my My Uneven COVID-19 Response and the things I don’t know.

But, this market is not crazy and wasn’t unpredictable.

Having a recession and bear market eleven years after the last ones are normal, especially considering that the economic expansion that just ended was the longest ever.

Stocks dropping 35% in a bear market is not crazy. That’s the average bear market decline linked to a recession.

The market recovering while the economy stinks is normal. The last bull market started in March, 2009 a full three months before the Great Financial Crisis ended. I know it’s frustrating, but it’s one of the paradoxes that makes investing difficult.

The cottage industry of recovery skeptics scolding the markets for cranking higher before they were ready for the rally is also normal. So are the never ending bubble callers.

The market is not crazy. It’s moving at light speed, which is new and unsettling, but it’s not crazy.

The market sold off in anticipation of a major economic shutdown eleven years after the last major sell-off. The economic data and unemployment numbers reported shortly thereafter were awful, confirming the market’s move. Stocks then rallied in anticipation of an eventual economic recovery (and encouraged by better stock market deals, the Fed actions, and government stimulus), setting up this image of a major disconnect because it happened during bleak economic times. But through all of this, most of the market’s reactions seem normal.

Should it be moving this fast? I have no idea what the right velocity should be, but the market seems to be keeping pace with how fast life is moving around this new virus. Could we retest the lows of March 23rd because the market is getting ahead of itself and more bad news is coming? Sure. But remember something this chart helps illustrate. The market typically trends up. Bet against the trend if you want. I will not be.

One of this blog’s key themes is that you can get wealthy through disciplined investing in stocks and learning how to avoid the infinite short-term traps that keep us from realizing our fair share of stock market returns (click here for the other themes). I’ve said it a lot, but it bears repeating:

If you don’t need the money you have invested in stocks for a while, or you have a multi-asset class portfolio that you are living off of, worrying about false rallies, or when the next bear market will be are strong examples of distractions you should ignore.

The stock market is volatile right now and that should be expected to continue given the economic uncertainty related to COVID-19. Volatility is the short-term price we pay for strong long-term returns. But volatility and rapid movements do not mean the market is broken. Stick to your long-term plan.