What to Expect on the Stock Market’s Wild Ride - OZY | A Modern Media Company


Because there are a few principles that still apply in these unprecedented times.

Alonso Garza is head of funds management for a real estate company and previously spent 12 years in investment roles at Goldman Sachs.

It was Joseph Heller who coined the term Catch-22 with the 1961 publication of his novel by that title: a dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.

Unfortunately, this is exactly where we find ourselves today, in a Catch-22. Health comes first, and for humanity to successfully slow the spread of COVID-19, we must exercise social distancing, which negatively affects the economy. Health and economy have become inextricably intertwined. To boost one is to sacrifice the other.

Not surprisingly, the past few weeks have experienced some of the most dramatic market swings in history, comparable to those of 1929, 1987 and 2008. This week, the Dow Jones Industrial Average dropped 17 percent, its worst single week since October 2008. The moves have been swift and ferocious, leaving many Americans in a state of real pain and anxiety that comes with job loss or the threat of it. And then there are the mostly better-off but still anxious investors, perhaps fretting about a depleted retirement fund and wondering: What should I do?

The next six to eight months will be difficult for all, but particularly grueling for companies that rely on debt to fund operations.

First, don’t panic. You are not the only one whose emotions are moving in tandem with the market. I promise you that even some of the savviest investors on the planet are feeling the same way you are. I lived through 2008 sitting in one of Goldman Sachs’ trading floors. At the height of the crisis, hearing statements from my colleagues such as “I am going to buy gold coins and bury them” were commonplace.

Second, put things into perspective. As terrible as the 1918 Spanish flu was, the world recovered, and that was without any of the medical advantages we have today. COVID-19 will normalize, we will endure and the economy will stabilize. Of course, this raises the question: When? The only thing that is certain is nobody knows, which leads to my next point. 

Third, avoid speculation. Social distancing will inevitably cause the economy to slow down and unemployment to rise. By how much remains a function of actions taken by the government and the private sector. A lack of action as a result of governmental gridlock could aggravate the market crash, while news of successful vaccine trials or additional monetary stimulus could cause a rebound. So which will it be? Unknown. You may miss a quick market rebound, but you could also avoid further downside. Let things settle a bit, be comfortable missing some of the upside (or downside!) and you will likely sleep better at night. 

Fourth, invest broadly. In times of market stress, company balance sheets tend to be tested, and I can promise you that as a result of a 12-year bull market, many companies have been fairly relaxed with their balance sheet management. The next six to eight months will be difficult for all, but particularly grueling for companies that rely on debt to fund operations and/or are facing a need to refinance in the near future. This will lead to a wave of corporate defaults, and many people stand to lose a lot of money.

The last thing you want right now is the added stress of having to closely monitor the balance sheet of any one company. Invest in broad market indexes such as the S&P 500. That way your odds of facing permanent capital loss is reduced to nearly zero — unless your view is that the existing system will collapse and a new one will emerge in its place. We are living through difficult times, but with effort and determination we will find our way forward. Stay healthy, be safe and as Voltaire once said: “Doubt is an unpleasant mental state, but certainty is ridiculous.”

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