During the COVID-19 Pandemic, many in the Berea College community submitted their unique perspectives on the situation to President Roelofs to share with campus. The following is the next in a series appearing here at Berea Beloved.
By Nancy Sowers, Associate Professor of Finance
Stock markets really started to roil while our Berea community was on spring break. From February 28 to March 20, the S&P 500 (a common index for measuring the market performance overall) decreased 21.98%. Of course on an individual level the most important thing is our health and physical safety, but it is likely that some are looking at their retirement accounts right now with a great deal of anxiety. The standard professional heuristic is to remember your long term plan, to sit tight and stay calm, that the average recovery period is about 24 months from a downturn. That this advice falls flat is understandable as you watch one metric for “all you have worked for” drop precipitously.
The stock market acts as a leading indicator for the economy overall, which means that it typically tells us what will happen to the economy about six months ahead. But what we are seeing now is a black swan event. Nassim Nicholas Taleb teaches us that a black swan event is “highly improbable with massive consequences.” Covid-19 appears to be the perfect example of this and, unfortunately, our financial models neither anticipate such events nor handle the effects well. As market shock turns to economic shock, we are all watching the economic situation unfold for the people we love, the friends we care about, and the students we have helped to develop over four years.
The silver lining here is that the Federal Reserve is moving more quickly with more tools than ever before to assure liquidity in the markets today. American ingenuity will rise as firms adjust their production to meet the shortfall of supplies so desperately needed in our hospitals. Toyota is donating industrial grade respirators; Hanes will make masks instead of underwear; our distilleries will shift to making hand sanitizer instead of bourbon. Volatility will play into the recovery too. Keep in mind that the people that cashed out their retirements in the last market downturn missed 6 of the 10 best days of market recovery and the start to a strong decade of market growth (PlanPILOT). The market on Tuesday (03/24/20) supports the idea that when the market does come back, the rebound is likely to catch us by surprise too.