Liz Frazier, Contributor
Feb. 15, 2021
2020 was a year of anxiety, uncertainty, turmoil and financial hardships. The anxiety was especially felt among those in the stock market, for good reason. The 2020 stock market crash caused by the coronavirus was a major and sudden global event that began on February 20th, 2020 and ended on April 7th.
The Coronavirus Crash of 2020
As the pandemic began it’s spread in March and government officials around the world shutdown economic activity, panic triggered by the economic consequences and uncertainty led to a stock market crash that included the three worst point drops in U.S. history.
- On Monday, March 9 the Dow fell 2,014 points, a 7.79% drop.
- On March 12, 2020, the Dow then set another record by falling 2,352 points to close at 21,200. It was a 9.99% drop, and the sixth-worst percentage drop in history.
- Finally, on March 16 the Dow plummeted nearly 3,000 points to close at 20,188, losing 12.9%. The drop in stock prices was so massive that the New York Stock Exchange suspended trading several times during those days.
Between Feb. 12 and March 23, the Dow lost 37% of its value. By the the middle of March, panic was rising. As the US went into lockdown mode, over 20 million jobs were lost, businesses closed and the virus continued it’s spread. Investors watched as their retirement savings lost 30% in two weeks, and speculation about how bad it could get created even more fear among investors.
As the world watched the coronavirus wreak havoc and feared more bad news, something happened in April. The market began to rebound. This seemed impossible, and confused many as there was such a disconnect between the economy and the market. Unemployment numbers were worse every week, the economy was basically shut down and at the time, no vaccine in sight. So how did this happen?
It wasn’t luck and it wasn’t random. There are a lot of people working behind the scenes to ensure our systems and infrastructure don’t fail. Congress and the Fed stepped in, interest rates were cut to near zero and a $2.3 trillion fiscal rescue package was launched, providing life support to markets, businesses, households and local governments.
Cautiously optimistic, investors began to wade back into the market, quickly swimming out deeper. By August 17th, the S&P 500 was up 27% from it’s low, setting new records again. By November 2020, US markets finally returned to January levels with the Dow passing 30,000 for the first time in history on Nov. 24.
With everything that happened in 2020, by the end of the year the stock market still grew. The Dow Jones gained 6.6%, S&P 500 gained 15.6% and the Dow Jones was up an astonishing 43.7%.
The Most Valuable Lesson in Investing
While there was (and still continues to be) a very real economic, financial and health crisis globally, market fluctuations aren’t based solely on economic factors. The economy is a major factor, but panic plays just as equal a role in stock market volatility. In 2020, panic stemmed from uncertainty about the coronavirus and economy. Then at the end of the year even more uncertainty and panic arose, fueled by a contentious presidential election.
While maybe not to the extent of 2020, stock market crashes happen on a fairly regular basis. Luckily, so do major market recoveries. The Dow Jones dropped 24.8% during the The Great Depression (1929). The market lost 22.6% of it’s value in one day on the Black Monday crash of October 1987. Most recent, the Great Recession of 2008 caused the Dow Jones to lose 50% of it’s value. But with each crash, the market recovers, generating an average yearly growth rate of approximately 10% throughout it’s history.
Personal Capital’s Chief Investment Officer, Craig Birk says if we learned anything from 2020, we learned why it’s so important to have a long term plan and stay the course. “There were a lot of stories this past year that were hard to understand. In reality, the market didn’t change much, and the average investor’s big picture goals didn’t change. But so many storylines around coronavirus and the election caused distraction.” Birk says his investment recommendations for 2021 are the same as they were for 2020, and the same they’ll be next year: Understand your goals and situation, have a long term plan, and ignore the distractions.
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