And just like that, the S&P 500, Nasdaq, and Dow Jones hit their all-time highs, and the COVID-19 market sell-off had been erased. Just before the COVID-19 pandemic struck the markets, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect, but they were ill-advised in what was an already frothy market with stretched valuations prior to COVID-19. I'm sure Ray Dalio quickly realized that his "cash is trash" mentality, and public statements were imprudent. The COVID-19 pandemic has been a truly back swan event that no one saw coming. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs.
The S&P 500, Nasdaq, and Dow Jones shed over a third of their market capitalization at the lows of March 2020. Some individual stocks lost over 70% of their market capitalization. Other stocks had been hit due to the market-wide meltdown, and many opportunities were presented as a result. Investors were presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I started to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It was important to put this black swan into perspective and see through this crisis on a long term basis while viewing COVID-19 as an opportunity that only comes along on the scale of decades.
Most Extreme and Rare Sell-Off Ever
The abrupt and drastic economic shutdown and velocity of the U.S. market's ~30% drop within a month bring parallels to the 1930s. This sell-off was extreme and rare in its breadth, nearly evaporating entire market capitalizations of specific companies. The pace at which stocks dropped from all-time highs was the fastest in history. The major averages posted their worst week since the financial crisis (Figures 1 and 2). The Dow had its worst month since 1931, and the S&P had its worst month since 1940. Continue reading "Seeing Beyond The Black Swan Event - Part 2"