There Was No Stock Market Panic Today. Are Investors Smarter?

The stock market finished lower on Friday, but the size of the move lower was relatively contained. Although the Nasdaq Composite finished with declines of more than 2%, the damage to the Dow Jones Industrial Average (^DJI 0.67%) and S&P 500 (^GSPC 0.87%) was limited to less than 1%.

Today's stock market

Data source: Yahoo! Finance.

Perhaps the most remarkable thing about the stock market was that there was no outright panic on Wall Street. That might seem like a given in today's world, but when you think about what market participants might have done in the past in situations like this, you have to give investors credit for not reacting emotionally to what could have been a highly charged issue.

The leader of the free world is seriously ill. Wall Street yawns.

The news overnight was dire. President Donald Trump was reported to have tested positive for COVID-19. Stock market futures were down sharply.

You certainly couldn't have blamed investors if they decided to have a mass panic attack. The coronavirus pandemic has killed more than 1 million people worldwide, including more than 200,000 in the U.S. alone. World leaders haven't been immune, as U.K. Prime Minister Boris Johnson and Brazilian President Jair Bolsonaro also tested positive earlier this year. Johnson in particular took seriously ill and spent time in an intensive care unit.

Yet on Wall Street, there were no signs of extreme worry. Stocks even managed a midday recovery, with the Dow moving into positive territory briefly. Moreover, the small-cap Russell 2000 Index finished the day up half a percent.

Image source: Getty Images.

Have investors learned?

The lack of panic shows that at least for now, investors seem to have figured out that knee-jerk selling in response to a crisis situation isn't the right thing to do. Certainly, the events of 2020 have given market participants plenty of opportunity to learn that lesson.

Lots of investors panicked early this year when the coronavirus pandemic first started. Stock markets fell and fell without pause, with major market indexes eventually losing more than a third of their value in the span of just weeks.

Yet as it became clear that government institutions were prepared to take the drastic measures necessary to keep the economy going during unprecedented conditions, investors quickly got their bearings back. Nearly as quickly as it had fallen, the stock market recovered. The Nasdaq and S&P 500 have since jumped out to new all-time highs. The Dow hasn't, but it did manage to bounce back substantially.

Since then, investors have seemed almost numb to bad news. Unemployment rates remain high, Washington remains gridlocked on further economic assistance for Americans, and now the president's health is in danger. Yet through it all, people remain confident that in the long run, things will work out.

Be ready for whatever happens

It's good that investors aren't panicking over short-term events. That's no guarantee that the stock market will always manage to dodge future panic attacks, but it does suggest that those who own stocks own them for the right reasons.

If you have confidence in a company's long-term prospects, then the short-term events that often rattle markets shouldn't have any impact on your views. Those who can maintain that discipline have accomplished one of the hardest things to do in investing.