The future is unknown to all of us. In some cases, looks are not deceiving. When the market appears to be on the cusp of freefall, it can in fact accelerate downward.
It's good to make decisions with a sober view of risk and reward. I feel so much market advice that filters down to us laypeople is whether we should or should not buy or sell, when really it is all based on our level of risk tolerance, how much in terms of assets we have, what our time horizons are, what our expertise is. I would say a healthy young person with plenty of cash to burn might well look at buying stocks now. But a person nearing retirement, perhaps with health issues, they should probably board up and get ready for the storm. Most people below retirement age should probably just stop freaking out and keep contributing to their retirement plan as they (hopefully) have been doing, and make sure to have some cash on hand.
Our society does not do well with self-control or with gray areas. We want easy answers, which, unfortunately, don't usually exist.
That's because you hear them when they are making gains, never when they are losing.
I could be wrong, but I'd see survivor bias as "at the end of the day, everyone still in the game reports their results", not acknowledging that those doing really poorly might walk away from the game.
This is where the panic goes to though: they might have 2-3 months cash right now, but might feel like they need 12-24 months cash to ride things out. People start worrying they'll lose their jobs and then their runway is at the mercy of the market. If a significant chunk of your wealth is in your house, that isn't easy to get out of during a downturn. Your tolerance for risk goes even further down if you have a family. Even further if your spouse doesn't work.
These are rational decisions that look like panic selling.
Tech work is a field that likely won't have to worry about this though.
With tech stocks tanking and economic growth likely sluggish for at least the next eighteen months, I can see large tech firms putting a hiring freeze in place, making it more difficult to switch jobs and more difficult to get hired if you DO get laid off.
Moreover, all that RSU comp that makes such a big portion of many tech workers take home pay just took a 20% haircut from a few weeks ago. It could well go lower.
Then there is the startup scene. I can definitely see current events massively impacting funding (see the recent Sequoia post). This could quite reasonably cause many startups to fail just like they did in 2008.
The IPO market is also going to be hit. I don't see any major unicorns doing an offering until the recovery happens. A lack of IPOs means, again, that the people willing to contribute to earlier stages of the pipeline, dry up.
Then there are secondary and tertiary effects. If the average tech worker sees their total comp drop by 10% to 20%, and quite a few lose their jobs, do you think the home you just bought in SF is going to be worth more in a year, or will there be some reduction (in appreciation if not absolute values)?
Right now it really isn't that bad. I'm in London and going to work normally, the city is busy and the trains are still full in the mornings. Our company is starting to migrate people to working from home though. So a proportion of each team is wfh and staying there, for 14 days or until otherwise notified, and more will probably follow not because there is immediate danger, but because we want to be well prepared when there is.
If the markets are like this when there are a few hundred cases in the UK and US, what will they be like when there are tens, or hundreds of thousands of cases and major cities are in lockdown?
Back to investing, stocks are down significantly and it's quite possible now is a good time to start buying, for those with the capital. Maybe spreading out a balanced equity investment portfolio over the next several months. I don't know if or when the market might go lower, or by how much, but it seems unlikely it's going to rally all that much given that we can be pretty sure there's plenty more bad news still to come. So investing too much now might miss further falls, but IMHO buying over several months is unlikely to miss the dip. That's how I see it anyway.
Investors are trying to judge the likelihood of these very events and selling / buying accordingly. Markets are based on predictions.
For example it’s likely several more airlines will go to the wall, but we don’t know which ones yet.
I flew from Seattle to San Francisco and back this weekend. In both cases, my "prime time" flights were less than 1/3 full. Returning yesterday, there was literally zero wait at bag check and security, I walked straight up to an agent. Haven't seen an airport like that in years, let alone a major.
Some conservative predictions are arriving at millions of cases in a couple of months. There are too many unknown variables for an accurate prediction but, without really drastic measures, it's difficult to argue with exponential growth.
At some point it will plateau and become another seasonal flu. And we may even get vaccines. But I agree that things are going to become way worse before they improve. Most worrying is the strain on the health care system, which may by itself worse prognosis on other, otherwise unrelated, diseases.
Why?
I am not an economist though, this is just my layman’s view.
What you actually have to figure out is: is there any unexpected future efficiency gains that the market doesn't expect. You have to know something that the market does not.
Isn't this ignoring opportunity cost, uncertainty, etc.? If the expectation of future gains is priced in, wouldn't treasury bonds sell for face value + remaining interest on the secondary market?
You don't actually need to improve efficiency/productivity if the government has tools like the discount rate, open market operations, the ability to alter margin requirements on derivatives, fed funds rate, as well as programs and policies like MMIF, TAF, CPPF, ABCP, TALF, ZIRP, to manipulate the money supply and the velocity/flow rates of money.
Assuming you have no pressing needs for your invested capital (e.g. most retail investors), the market cannot actually stay irrational longer than you can remain solvent.
Well, the companies that don't go bust.
(1) They trade on margin, so huge drops are much more dangerous to them
(2) Their boss sees a Profit & Loss for the trading day that evening, if they don't like what they see they might give their portfolio to somebody else.
(3) Customers are calling the sales desk and they want to sell; hopefully sales can slow them down, but you may need to sell to pay for redemptions. Many customers may need to sell to rebalance their portfolios, get liquidity, etc. This is a mechanism which can carry instability from one market into another one which would otherwise be doing just fine.
There are a handful of hyper-geniuses that can make gobs of money by actively trading. For the rest of us, there's buy and forget.
Because the Harvard endowment, like most all other funds out there, generally fails to beat the market and has had down years even while the market was up. This is probably due to lower risk tolerance, but it doesn't really show that hyper geniuses are running it either.
Where I live real estate was massively overpriced, so still hasn't rebounded, more than 10 years later.
* this is obviously the caveat and where things went wrong for people.
You're also forgetting that they had somewhere to live for a decade for the cost of inflation of the house, which is significantly cheaper than normal rental prices in many places.
To come out even after a decade, after housing costs, seems a pretty "safe" investment to me. Certainly not as lucrative as having invested in an index tracker, but it beats the 0% interest my bank pays on my current account balance.
Why not? Assuming you can weather the bear market, the bulls will eventually return, no?