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Understanding the impact of COVID-19 on the stock market

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4 mins

The Dow Jones Industrial Average started off the new decade strong, reaching historic heights when it eclipsed 29,000 on January 15.

Since then, the Dow has posted record losses on March 9, 12, and 16, each one worse than the last. It has tumbled a whopping 25%, ushering in the first bear market in 11 years and a recession.

This has been the impact of the global COVID-19 pandemic so far. Here's how we got here and what to watch for moving forward.

A new level of uncertainty

Until legitimate progress is made in flattening the novel coronavirus outbreak's curve, financial markets will continue to struggle. But what exactly will this progress look like? And when will the restrictions placed on our personal and professional lives be lifted? No one is certain, and the stock market despises uncertainty.

Although coronaviruses are not new, COVID-19 is an unknown quantity. This particular virus has never been seen before. And while the right people are doing everything to find a cure, there is not one available at this point.

Naturally, the stock market is reacting negatively to the fact there is no firm date set for life to return to normal. When unemployment will stop rising, corporate earnings will resume growing, and essential and non-essential businesses alike will be able to go back to business-as-usual.

From financial experts and market commentators in the news to money managers at the most prestigious trading firms on Wall Street, few are ready to speculate when the stock market will take a U-turn back toward previous levels. Many are cautiously optimistic that it will be soon, but they’re also waiting for the other shoe to drop.

Volatile market conditions

Up to this point, extreme volatility has become the norm for the stock market in the age of COVID-19. Swings of 1,000 points or more in a given day for the Dow Jones industrial average are not unusual. More stocks in the red (market down) are being seen than green (market up) almost every day as losses continue to mount. The United States is now in a bear market, and a recession, directly because of COVID-19.

COVID-19 has caused both individual and institutional investors to wince as they watch their investments and account values continue to decline. People are reluctant to check their retirement account balances out of fear of what they’ll see as their nest eggs continue to shrink.

News and corresponding investor sentiment drive the stock market. If you turn on the nightly news or tune in to one of the 24-hour news channels, you’ll see that there isn’t any positive information right now concerning COVID-19. Each night as new statistics on the number of new cases are released, the stock market has a corresponding reaction the next morning. In the past several months, only the approval of coronavirus Stimulus Package has brought any significant relief for more than three consecutive days of positive gains.

Common themes to watch

There are a couple of key themes that investment professionals share when it comes to navigating these extremely turbulent times.

The first is to not sell your stocks or mutual funds now unless you absolutely need the money. They point to the fact that the stock market has always rebounded over a 5-10-year time frame following a recession, and has in fact gone on to reach new highs.

The second piece of advice they seem to agree on is that there are still some stocks that are at a good point to buy. If you do decide to venture out into the choppy waters though, it’s best to slowly invest in these stocks as they hit new lows.

For example, if you have $1,000 to invest, it’s better to buy at four different price points for $250 each than it is to jump in with both feet and spend the full $1,000 all at once. Regardless of this advice, there are still many more sellers than there are buyers in today’s markets.

If you’re confused by what’s happening with the stock market and your investments, you may find it helpful to consult with one or more investment professionals to get their opinions on what would be a sound strategy for you.

The COVID-19 outbreak isn’t going to last forever. Life will get back to normal, with some long-term changes, and so will the stock market. Trading will resume and companies' stock prices will rise as they show quarter over quarter growth. Retirement account balances will also rebound over the coming years. It always looks darkest before the dawn.

Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published April 6, 2020
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