Exactly one year ago today, Feb. 19, 2020, the broad-based S&P 500 (^GSPC -0.23%) closed at what was then an all-time high of 3,386.15. Then, chaos ensued.
It was a well-known fact that a mysterious disease, which eventually came to be known as the coronavirus disease 2019 (COVID-19), was circulating in China in late 2019. On Jan. 13, the first case of COVID-19 was identified outside of China. One week later, the U.S. Centers for Disease Control and Prevention had confirmed the first stateside case in Washington State. Although positive cases continued to tick higher with each passing week, Wall Street seemed largely disinterested in this mysterious illness.
Everything changed after February 19.
The coronavirus crash: One year later
Over the next 33 calendar days, fear concerning COVID-19 crippled Wall Street and investors. The World Health Organization labeled COVID-19 a pandemic, and lockdowns were ordered in numerous states and highly populated cities. By March 23, 2020, the S&P 500 had lost 34% of its value.
It had taken just over three weeks for the widely followed index to enter bear market territory, and roughly a month for it to lose more than 30%. For some context here, previous bear market declines of at least 30% took an average of 11 months to come to fruition.
A plunging stock market wasn't the only record that was toppled between Feb. 19 and March 23, either. The CBOE Volatility Index, or VIX, a real-time representation of the expected volatility of S&P 500 options over the coming 30 days, hit a record high in March. Last year, 10 of the largest single-session nominal point declines in the S&P 500's history were registered (along with its eight biggest single-day point gains).
We even saw West Texas Intermediate crude oil futures dip into negative territory (minus $40 a barrel) for a brief period in mid-April. The COVID-19 global lockdowns caused crude-oil demand to crater like never before, creating an immense storage glut that wreaked havoc on the futures market.
But here we are, one year later. COVID-19 vaccines are beginning to make their way to tens of millions of people around the world, and all three major U.S. stock indexes are nipping at new all-time highs.
The past year has been a fantastic learning experience for the investment community, and it's offered three key lessons.
1. Stock market crashes and corrections are normal, yet unpredictable
If we learned anything as investors from the coronavirus stock market crash, it's that big downside moves are completely unpredictable. Previously, I tossed out around two dozen ideas as to what could cause the market to crash, and this was ultimately something not on my -- or a majority of other investors' -- radar. We're never going to know why a crash occurs, when it'll happen, how steep the decline will be, or how long it'll last, until well after the fact.
However, the COVID-19 crash served as a solid reminder that stock market crashes and corrections are more common than you realize. Since the beginning of 1950, the S&P 500 has undergone 38 declines of at least 10% (the official cutoff for a correction). That works out to a notable decline every 1.87 years, on average. Even though the market doesn't adhere to averages, it does clearly show that there's a price of admission to the greatest wealth creator on the planet.
2. Investor emotions tend to overshoot
Secondly, the coronavirus crash was an excellent reminder of what happens when emotions rule the roost. Over the long run, operating-earnings growth is what drives equity valuations higher. But in the short term, it's not uncommon to see emotions act as the driving force behind wild vacillations in stocks.
The thing about emotional investing is that it tends to overshoot to both the upside and downside. In the 33 calendar days between Feb. 19 and March 23, 2020, the S&P 500 lost 34% of its value. This seemed like an incredible overreaction given the amount of liquidity available for businesses, the progress being made on Capitol Hill toward what became the $2.2 trillion CARES Act, and the Federal Reserve's pledge to buoy financial-market instability with ongoing quantitative-easing measures.
A year later, we're still seeing investor emotions overshoot. The Reddit-fueled rally in a dozen or so heavily short-sold companies or penny stocks is another example of emotions getting the better of investors and clouding their better judgment.
3. All crashes and corrections are a buying opportunity if you have a long-term investing horizon
Perhaps most importantly, the coronavirus stock market crash was yet another confirmation that long-term investing is a winning strategy.
Although the rebound from the bear-market low on March 23 to fresh highs took the S&P 500 less than five months (that was also a record), it really doesn't matter how steep or protracted a bear market or correction is. As long as investors hang onto or add to their high-quality and innovative businesses, they're often handsomely rewarded over the long run.
Here's another way to think about long-term investing. Over the trailing 40 years, investors have navigated their way through the Black Monday crash in 1987, the dot-com bubble, the Great Recession, and the COVID-19 crash. Despite these events, the average annual total return (including dividends) for the S&P 500 over this four-decade stretch is 10.96% (Feb. 14, 1981 to Feb. 14, 2021). In aggregate, this is a total return of 6,313%.
Sticking to your investment thesis and buying great companies during crashes and corrections is a proven method to build wealth in the market.