By Lisa James & Lori Zager

Bombs and tweets couldn’t sink the S&P 500, but COVID-19 did.

As of March 18th, the S&P 500 is down 30% from the February high of 3,394, bringing it very close to the lows of Christmas Eve 2018. The average decline of the S&P 500 in a bear market since 1929 is 38%, so although the market will likely go lower, a significant amount of damage has already been done.

Behavioral reactions in volatile markets

The gut-wrenching volatility of current markets brings out loss aversion, a well-known behavioral bias. Most people prefer avoiding losses to making equivalent gains—they would rather not lose $20 than win $20.

Scary environments activate the more primitive parts of our brain, creating a counterproductive fight-or-flight response.

While equity investments are the growth engine of portfolios, it becomes difficult to keep buying during periods of extreme uncertainty. Some investors choose to sell instead, but this behavior can lead to missing the biggest up days, with serious long-term consequences.

Growth and recovery after bear markets

Historical data shows that missing key recovery periods can dramatically impact long-term returns.

After significant equity sell-offs, markets have historically produced strong forward returns, and those rebounds can occur quickly.

What happened to bonds this time?

Traditionally, bonds act as a hedge for equities, often rising when stocks fall. This time, however, the bond market behaved differently.

As 10-year Treasury yields approached zero, the bond market revealed that “risk-free” does not mean immune to losses.

• Long-term Treasuries initially provided some protection but still declined
• Investment-grade bond funds fell more significantly due to credit concerns
• Short-term U.S. Treasury rates dropped to approximately 0.02%, suggesting near-zero returns on “risk-free” cash

The era of meaningful risk-free yield appears to be over—for now.

What should investors do?

1. Maintain sufficient cash reserves

Have enough cash to cover one to two years of living expenses.

2. Improve liquidity if needed

• Check whether interest and dividends are being automatically reinvested
• Consider switching to cash distributions if additional liquidity is needed

3. Rebalance portfolios

• Sell assets that have held up, such as short-term bonds
• Avoid becoming underexposed to equities relative to your long-term plan

4. Rebalance gradually if not withdrawing

Incremental rebalancing ensures you are systematically buying equities at lower prices during the selloff.

5. Consider gold

Gold declined during the initial phase of the selloff as investors sold assets with gains.

While gold does not generate cash flow, it can serve as a diversifier—especially when real interest rates are near zero or negative.

Looking ahead

If today’s deflationary shock eventually shifts toward inflation—driven by:

• Elevated debt levels
• Large-scale monetary expansion by the Federal Reserve
• Fiscal stimulus from Congress

then portfolio positioning may need to account for a very different environment.

Stay safe—and don’t touch your face or your 401(k) (except to rebalance).

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