Q2 Was Tough On Those Who Panicked At The End Of Q1

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Posted: Jul 09, 2020 11:11 AM
Q2 Was Tough On Those Who Panicked At The End Of Q1

Source: AP Photo/Richard Drew

The general rule is not to let emotion get to you when investing.

"Buy on Fear, Sell on Greed? Legendary investor Warren Buffet is a big proponent of this strategy. When others are greedy—typically when prices are boiling over—assets may be overpriced. On the flipside, there may be good buying opportunities when others are fearful.

“Most importantly, investors need to remain disciplined with their investment process throughout the volatility. History has shown that markets will eventually recover, and may reward patient investors."

(Source: Visual Capitalist)

The following graphic shows that markets historically tend to recover after 'black swan' events, i.e. unexpected negative economic or market events.

(Source: Visual Capitalist)

The data tend to show that the more rapid the fall, the more rapid the recovery.

Event

Start of Sell-off/Previous Peak

Size of Sell-off

Duration of Sell-off (Trading Days)

Duration of Recovery (Trading Days)

Israel Arab War/Oil Embargo

October 29, 1973

-17.1%

27

1475

Iranian Hostage Crisis

October 5, 1979

-10.2%

24

51

Black Monday

October 13, 1987

-28.5%

5

398

First Gulf War

January 1, 1991

-5.7%

6

8

9/11 Attacks

September 10, 2001

-11.6%

6

15

SARS

January 14, 2003

-14.1%

39

40

Global Financial Crisis

October 9, 2007

-56.8%

356

1022

Intervention in Libya

February 18, 2011

-6.4%

18

29

Brexit Vote

June 8, 2016

-5.6%

14

9

COVID-19*

February 19, 2020

-29.5%

19

N/A (ongoing)

* Figure as of market close on March 18, 2020. The sell-off measures from the market high to the market low.
(Source: Visual Capitalist)

The recent sell-off certainly was a rapid one:

(Source: Visual Capitalist)

Which means it should come as no surprise to see the markets come back very strong in the second quarter of this year:

(Source: Statista)

Our internal analysis indicates that these very high returns in the second quarter might understate the nature of the market rebound as these indices are somewhat dominated by large companies, and in general, smaller companies tended to outperform larger companies during the second quarter.

The old adage about not selling during, or especially towards the end of, a panic seems to hold true so far this year.

Sources:

“Black Swan Events: Short-term Crisis, Long-term Opportunity,” March 2020, VisualCapitalist.com
“U.S. Stock Market Wraps Up Best Quarter in Decades,” July 2020, Statista.com