Finance professor says stock market drop is temporary, investors should not panic
Auburn University finance scholar James R. Barth says the stock market drop is temporary and that government funds going to individuals and companies will provide the boost needed to get the economy going again. Most of all, he says investors should not panic.
What is happening to the stock market?
Stocks prices have declined sharply in recent weeks due to the coronavirus and shutdown in large parts of the economy. But the stock market rebounded sharply on March 24 and continued its upward movement early on March 25. This is terrific news because stock prices are based on expectations about the future, not the past. This no doubt reflects the $2 trillion in government funds now going to individuals and firms to cover necessary expenses. It also reflects the $4 trillion in liquidity that is available from the Federal Reserve to support all sectors of the economy. And, of course, it reflects President Trump’s hope, based on actions being taken, that large parts of the economy in geographical areas less affected by the virus can go back to work on April 12.
When will the stock market get back to where it was before the coronavirus shock caused the shutdown of large parts of the economy?
The novel virus is temporary so it follows that the shutdown in the economy is also temporary. Therefore, so too is the sharp decline in the stock market. In three periods in the past 15 years when stock prices declined by more than 30 percent they got back to where they were within two to five years. This means investors should try to remain calm and not panic, which does no good for anyone. Once the coronavirus situation improves so too will the economy and the stock market. And there are already hopeful signs that this is happening in terms of containing the spread, treatment and prevention of the virus. It is important to realize that for those investors who have not sold stocks the losses are only paper losses and not actual losses. Indeed, for patient investors there may not be any actual losses.
Is now the time for investors to buy rather than sell stocks?
Some investors are already doing that, but one has to be prudent when doing so. Clearly, not all stocks have declined in price over the past few weeks. There are companies still operating and generating more revenue do to events taking place like remote work and teaching whose stock prices have understandably gone up.
It is important to remember that what has happened to individuals and firms was not their fault but due to a health crisis. And once this crisis ends, and it will end, the economy will once again resume its upward trajectory to the benefit of everyone.
About James Barth:
James Barth is the Lowder Eminent Scholar in Finance at Auburn’s Harbert College of Business, a Senior Fellow at the Milken Institute and a Fellow at the Wharton Financial Institutions Center. He has been a visiting scholar at the U.S. Congressional Budget Office, Federal Reserve Bank of Atlanta, Office of the Comptroller of the Currency and the World Bank.
Auburn University is a nationally ranked land grant institution recognized for its commitment to world-class scholarship, interdisciplinary research with an elite, top-tier Carnegie R1 classification, life-changing outreach with Carnegie’s Community Engagement designation and an undergraduate education experience second to none. Auburn is home to more than 30,000 students, and its faculty and research partners collaborate to develop and deliver meaningful scholarship, science and technology-based advancements that meet pressing regional, national and global needs. Auburn’s commitment to active student engagement, professional success and public/private partnership drives a growing reputation for outreach and extension that delivers broad economic, health and societal impact.