Broker Check

How Significant is the latest Market Decline?

September 10, 2020

The U.S. stock market has suddenly been hit by a new bout of volatility, reminding uneasy investors of the sharp downturn last February and March.  We are nowhere near that level of decline at this point, but the fact that it happened once means that it could, conceivably, happen again.


Market analysts were at a loss to explain how the major indices were constantly breaching new record highs when the U.S. economy was wounded by the pandemic, and they seem not to be much better at explaining the recent—so-far-brief—selloff.  But the answer is always the same: investors, particularly quick-twitch traders, suddenly started feeling less bullish and started taking some of their profits off the table.  Whether this newly-cautious psychology will take hold and turn into a panic, or pass and allow the market to resume its climb, is impossible to predict.


What we DO know is that the unemployment rate is continuing to fall as the jobs picture has improved for the fourth month in a row.  But that still means that roughly 8.5% of able-bodied Americans are out of work, which cannot be good for overall economic productivity.  We know that the Federal Reserve Board, which has pockets of unlimited depth, is committed to keeping interest rates low and pursuing the stabilization of the markets.  Congress is debating another round of relief for Americans hit hard by job loss and pandemic-related economic hardship, which could stimulate consumer spending similar to the previous stimulus bill.  There is great uncertainty about whether we will see a resurgence in the pandemic, and the shadow of the November election has created its own levels of anxiety on both sides of the political divide.  Depending on how you feel about these factors, positive or negative, likely colors your view of the current market valuations.


The decline has been led by (largely unanticipated) drops in some of the largest technology companies, which make up a huge percentage of the S&P 500 index—and it was precisely these stocks which had previously been responsible for the soaring index.  Apple shares fell more than 6%, while Facebook and Amazon were down more than 4%.  Microsoft slid 5.4% and Netflix closed 1.8% lower.  Alphabet (Google) lost 3.6% of its value.


So far, the drop is a small fraction of the 50% rally since the March low—down 2.3% last week, down another 2.8% to begin this week—and nobody should be surprised if and when the market pulls back from record highs.  Only a working crystal ball will tell us whether the markets are taking a breather or previewing yet another bear market, but perhaps the rapid recovery after the severe February/March downturn can give us some comfort.  Long-term, the U.S. economy steadily builds value in public companies, and in every instance in the past—through wars, recessions and even pandemics—the markets have eventually recovered from downturns to post new highs.  The next bear market, when it comes, should be no different.