Have you lived through a financial panic?
A few days ago, some readers would have answered “No,” they have never experienced such an event. In a few short days, many have probably come to realize the difference between imagining such an event or the actual emotional impact of seeing your Thrift Savings Plan (TSP) balance drop rapidly as stock prices drop rapidly.
But, if you are a stock investor in the TSP or in other financial programs, you are now in the midst of such an event. Once the herd mentality takes hold and everyone wants to sell, many others follow. Prices drop like a rock. The federal government’s efforts to date to stop it have not been successful.
And the panic is not just in selling financial instruments. Those of us who have been to the grocery store may have felt at least a little bit like we were living in the former Soviet Union or Venezuela.
Grocery shelves are often empty. Toilet paper is at a premium, apparently, because many consumers are afraid they will not have enough to get them through the summer and no more will be available. Sometimes people are lined up to get in as soon as the grocery store or Costco opens its doors—perhaps with newly stocked shelves.
It is still early in the year and meat displays look like it is almost July 4th and everyone is afraid they will not be able to buy any more meat. American freezers must be overflowing with Angus steak.
There is plenty of discussion about a possible recession. That is not new, but with restaurants being told to close down, travel services being hit hard with people staying home or at least not traveling anywhere, and a variety of consumer stores looking empty, the possibility of a recession hitting in the near future is becoming increasingly likely.
People are now concerned that the impact of the panic and new restrictions on businesses will have a substantial negative impact on our economy and likely in the rest of the world as well. That is a logical conclusion, we just have not seen the numbers yet confirming the impact on our business concerns.
The stock sell-off on March 16 is the index’s biggest percentage decline for the Dow Jones Industrial Average since the “Black Monday” crash of 1987 — and the 2nd worst in its 100-plus year history. It is also the largest point decline on record.
So, does Wednesday, March 16, represent the final big drop in the stock market? Probably not, but it is impossible to guess when buyers will jump back into the market because the stock valuations have become too good to ignore. There are already predictions that the market will drop even more before the current financial panic subsides.
Based on historic precedent, we will probably reach the low point of the market when a large number of stock investors decide to sell their stock after watching the prices drop about 30% or more. They do not intentionally sell at the market’s low point but that is often the result.
Moreover, we do not know how long it will take this market to again reach its previous high point. There is no guarantee it will not take at least a year or two depending on a variety of events, including efforts to develop a vaccine or other antidote to COVID-19.
TSP investors who have a balanced portfolio and keep investing throughout this downturn, just as they invested in the years when the market kept going up, are much more likely to reap a financial reward down the road.
While the current financial panic and bear market makes all of us nervous as does having doubts about our financial security and health in the near future, these events have always had a way of turning around—sometime when we least expect to hear good news.
While there are undoubtedly far fewer TSP millionaires than there were a month ago, those who keep their wits about them and do not sell when a wave of negative emotion sweeps in are likely to again reach that level of success.