Guiding Our Clients Through Extreme Markets: The Pandemic*

The Challenge

The onset of a global pandemic in February and March 2020 caused extreme volatility in markets. For example, on March 11, the Dow closed down 20.3% from its February high, launching the first bear market in 11 years. On March 12, the markets experienced their worst daily performance since 1987: the Dow fell a record 2,352.60 points, a 9.99% drop, almost a correction in a single day. Between February 12 and March 16, the Dow lost 9362.90 points, a 31.7% decline. The drop in stock prices was so massive that the New York Stock Exchange suspended trading several times during those days.

PMA’s Process

Our professionals were in regular contact with each other and with clients during these events. When the first hints of the pandemic rattled markets in February 2020, PMA sent a special notification to clients on February 27 which stated, in part, as follows:

Our recommendation is to not make any changes, for the following reasons. First, selling stocks during a time like this means turning paper losses into realized losses. You do not truly realize losses until you sell. Second, for clients in taxable accounts, selling now may generate large capital gain taxes, a consequence of the decades-long bull market. Third, we have always stressed long-term investing in the context of a natural and deep-seated optimism about the long-term prospects of America and the world’s future.

On March 13, PMA reiterated this advice in a communication to its clients: “Selling out of the stock market during these periods of volatility and moving exclusively into cash or bonds is a type of ‘market timing’ effort that is not the recommended strategy. Those who followed such a strategy during the market turmoil in 2008-2009 missed the subsequent significant recovery reflected in the chart above.”

Finally, on March 23, 2020, shortly after governmental orders required businesses to work remotely, PMA wrote to its clients about its remote operations and also stated the following: “History and studies have shown that when markets rebound from unpleasant declines is not predictable in advance, and that missing a very few days of the rebound when it occurs has an adverse effect on a portfolio’s performance. As said by Charlie Munger, the partner of Warren Buffett, being able ‘to react with equanimity’ to large equity declines is ‘in the nature of long term shareholding.’”

The Resolution

PMA’s clients who followed this advice were able to benefit when the markets recovered from these declines and, in fact, reached new highs. Both the Dow and the S&P 500 finished the year 2020 at record levels despite the public health and economic crises.

*This scenario represents a composite of discussions with a number of different clients. It is not reflective of one particular client’s experience.