Why do stocks plummet after major events? Can't stockholders just stay calm?

Why do stocks plummet after major events? Can't stockholders just “stay calm”?

Markets sometimes plummet after major events. Sometimes they don’t though.

Take last year as an example. Here is how markets reacted to the news that Covid was getting worse in Korea, China and Iran in early February 2020:

They hit a record. Close to 20% rise on February 2019, despite the worries.

Then this is how they reacted to the first lockdowns across Europe and the US:

A huge 50% drop, in record time. Then markets started to recover.

Many people were expecting a second big fall around November.

The thinking was, markets went down due to the first lockdown. They will go down again, as this time you also have a potential disputed US election.

What happened? Europe went into a second lockdown and the US election result was unclear for days.

The talking heads in the media said such a situation would result in a market fall.

In late October, markets were falling as well, down up to 10% at one stage. This added to the worries.

What happened after the election? Markets skyrocketed by over 10%, even before the vaccine was discovered later in the month…..they even rose in the early days after the election.

Record highs were hit in many indexes even before the vaccine was found.

We see the same commonalities when it comes to wars, government shutdowns, pandemics and many other events.

Sometimes markets are calm - little changed. Other times they fall, and indeed occasionally fall hard.

Other times they skyrocket. Witness again how people were petrified of a Trump election almost as much as a disputed 2020 election.

Both times markets increased by a lot despite all the predictions.

So, we can’t predict these things. As you rightly say though, what we can predict is that people panic.

They panic about two things:

1. The possibility of a market crash
2. If a market crash happens

The first worry is ongoing because the media has predicted 100 of the last 3 crashes.

Probably ever single day one media article, usually more, has been predicting a crash since stock markets began hundreds of years ago.

Social media has only made it worse. Every single day “forever” now, I expect numerous articles to predict a crash.

Usually the predictions don’t turn true. Occasionally they do. Often every 5–20 years, there is a big crash……..1987, 2000, 2008, 2020 etc.

There are countless smaller corrections of 10%-25% as well, like in late 2019.

When such events happen, people usually forget the following facts:

1. The people who predicted this one right got the last one wrong. Take 2008–2009. Almost everybody I know didn’t predict it. Those that did, didn’t expect markets to recover so quickly. Same in 2020.
2. Nobody can predict or time markets consistently.
3. Markets have always recovered, even if individual shares and sectors don’t.
4. A bear market usually lasts months, not years.
5. In those rare times when markets are stagnant or down for a decade or longer, it is a good time to celebrate. 2000–2010 was a “lost decade” for most markets. That was something to celebrate as it allowed people to buy cheaply for a long-time. Imagine how profitable the 2020 crash would have been if markets would have stayed low for years.
6. As long as you are globally diversified and in both stocks and bonds, you don’t need to fear a crash. It makes sense to fear a crash if you own only 1 stock, or are only in one sector like the airlines, which may never recover from 2020. If you own the whole market you don’t need to panic.

What doesn’t help in this situation is the media, and sometimes even friends and family.

When you have people screaming that this time is different, especially when they seem intelligent, it is difficult for people to stay calm.

Thanks for Reading