(Friday, March 20, 2020, 9:15 p.m. ET) - With the stock market plunging more than 30% from an all-time high five weeks ago, what's an investor to think? The answer says more about the nature of the stock market than about the Coronavirus crisis.
Most individual investors have managed their retirement accounts through the global financial crisis of 2008, and maybe even through the tech bubble's burst in 2000. Baby boomers, nearing or recently retired, remember Black Monday, October 19, 1987.
While past performance is not a guarantee of your future results, the virus crisis is just the latest of many market crashes in recent decades to many investors in the stock market, and, so far, they appear to have have concluded, Covid-19, too, shall pass.
That's why recent mutual fund investment data from the Investment Company Institute shows no precipitous selloff in stock index funds. Sean Collins, chief economist at ICI, said in a March 11 blog post that investors in Exchange Traded Funds (ETFs) and stock mutual funds that are passively managed and typically pegged off the Standard & Poor's 500 index, had not experienced a sharp selloff or redemptions.
"To be sure, mutual funds and ETFs have seen outflows," says Mr. Collins. "And the outflows have been sizable in dollar terms. For example, during the week ending March 4, equity mutual funds had outflows of $14 billion. Bond funds saw outflows of $24 billion."
"But the outflows were small as a percentage of funds' assets. For the week of March 4, the $14 billion outflow from equity funds totaled just 0.12% of their assets as of the end of January. Outflows from bond funds were 0.50% of their assets as of the end of January, but still quite modest given the size of recent market movements."
Mutual fund investor data, so far, indicate the stock market's 30%-plus plunge reflects the activities of Wall Street firms and hedge funds - speculators and hedgers. This is money from institutions and private wealth, managed actively by traders not motivated by long-term investment goals. They are often vilified but they play a role in maintaining a free market. They are part of the price individual investors pay for maintaining a free market. Though they appear to exacerbate downturns like this one, they are at the margins of the market.
Meanwhile, investors for the long run, so far, have concluded that even if the worst-case scenario comes true - which seems extremely unlikely after today's news about the expansion of virus testing in New York - about 98% of the U.S. population would survive and corporate earnings would reflect that loss but be otherwise restored to "normal."
The Standard & Poor's 500 index, a benchmark of the value of America's largest 500 publicly traded companies, free markets, and a proxy for world progress, closed Friday at 2304.92.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal, and past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. It does not take into account your investment objectives, financial situation, or particular needs. Product suitability must be independently determined for each individual investor.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.