Déjà Vu All Over Again

December 3, 2021 · Written By J. Stephen Lee

Once again, some 22 months after a new virus exploded onto the world stage in early 2020, financial markets are being rocked by the now ubiquitous COVID-19.  Hard on the heels of Delta, a new South African variant dubbed “Omicron” by the World Health Organization is spreading worldwide, and fears of yet another wave of illness and shutdowns have unsettled financial markets. Volatility in both stock and bond prices has jumped. As Yogi Berra might have said, “It’s déjà vu all over again.”

While disconcerting, there are several things to keep in perspective:

  • A knee-jerk negative reaction to a troublesome new variant is understandable, yet the world is far from unprepared as it was in 2020. Vaccines are prevalent and treatment protocols expanding. So, while Omicron is not something to take lightly, and the societal impacts of a rise in cases is certainly not desirable, the effects should prove to be far better understood and much more manageable.
  • Viruses are remarkable organisms, and further variants and mutations are likely to be our “new normal.”  Like it or not, COVID is not going away, and we can expect periodic resurgences. Yet, societies and markets are adapting and will continue to do so. Never discount the ability of human ingenuity. Similarly, never forget that the first reaction of many uninformed market participants is to “sell first and ask questions later” – fear leads to poor decision making and is not a trait to emulate.
  • Particularly in the U.S., personal and corporate balance sheets are healthy – the world is awash in cash via last year’s extraordinary stimulus measures. Consumer spending has been strong, and while stubborn inflation is indeed something to watch, unemployment is low, jobs plentiful, and corporate profit margins healthy.
  • And while the long-term price direction is up, stocks experience downdrafts frequently. Consider that, as we have mentioned before, the average intra-year peak to trough decline in the S&P 500 is 14.3%. Yes, you read that right – on average, going back to 1980, there is a period during the year when stock prices drop by double digits. History tells us that since 1928, the S&P has experienced a decline of at least 10% roughly every 19 months. In 2021, we have not yet experienced that kind of pullback, so, for whatever the reason, one would not be out of the ordinary.

Put this all together and it points toward maintaining a steady approach to portfolios, governed by your long-term financial goals and objectives. Pushing the panic button, however tempting, is never the right solution.