As soon as COVID-19 hit the U.S., the stock market started a downward dive. In part because the country has enjoyed such a long bull market, it has been tough to watch investments and retirement accounts take such a sudden, severe hit. Tough, but not unprecedented, says V.V. Chari, the economic department’s Paul Frenzel Land Grant Professor of Liberal Arts.
“Every drop is slightly different,” Chari says, “but we have seen similar large-scale declines—and even bigger ones—numerous times in the past.”
Most notable, of course, was the infamous crash of October 1929 that sparked the Great Depression—the market lost 70 to 80 percent of its value that week—but we have also weathered other drops. Chari points to several in the 1950s and ’60s, the big one-day decline in 1987, the bursting of the tech bubble in 1999-2000, and of course, the financial crash of 2007-08
“There is no assurance as to when the stock market will recover,” says Chari. “A declining market reflects heightened uncertainty and unease about the future in the longer term. When the future looks bleak, equity markets and other markets are worried about long-term risk.”
One of the biggest unknowns, he says, is how long businesses will be closed and people will be asked to remain at home. Worst case scenario? “If this prolonged international shutdown continues for another six months, we could see unemployment rates go north of 30 percent—worse even than Great Depression,” says Chari. “You can see how, faced with that, investors in equity markets can become very nervous.”
The good news? “This is a durable country—we’ve been through a lot worse,” Chari says. “Eventually we’ll come back.”
As for individual investors, says Chari, the standard advice applies: Stay the course, don’t let short-term changes affect your decisions, and don’t try to out-guess the market. “That’s usually a failing strategy.”