Today, guest host Jeremy Schneider takes a deep dive into the COVID-19 stock market crash of 2020.
Specifically, he’s talking about:
- What the trading circuit breaker is and why it exists
- How the length and severity of the COVID crash stacks up to other historical catastrophic events
- What retirement investors should consider going forward when reviewing their investments
Jeremy also answers a listener’s question about rent vs buy given sky-high real estate prices.
If you’re a retirement investor interested in using history to make more informed decisions about the future, you’re going to love this episode.
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Jeremy Schneider
- Historical S&P 500 Data
- Visual of Crash and Recoveries
- Comparing Historical Stock Market Crashes:
- Rent vs Buy Calculator [NY Times]
How to Use the COVID Crash to Make Better Investing Decisions
Jeremy Schneider: Welcome to the Stay Wealthy Podcast with Taylor Schulte. As you may be noticing, this is not Taylor Schulte. This is Jeremy Schneider filling again for Taylor for the month of June. Taylor will be back in July and I assume better than ever because he just can't help continuing to get better.
So that's why I love him. If you wanna find the notes and links for today's episode, you can go to youstaywealthy.com/112.
So I'd like to take this back in time, back to a historical ancient time back to February of 2020. This was a time before the infamous Coronavirus crash. You may have heard of Coronavirus or Covid 19. It was a pandemic that is, you know, still raging through much of the world, but seems to be getting better in the United States, at least at the moment.
But in February of 2020, the market had not yet reacted to it. But what followed was one of the steepest and fastest stock market crashes in American history. It was crazy. I remember looking at my own personal brokerage account one day and I had suffered a $112,000 loss in a single day and I had four such days of six-figure losses in March of 2020 alone.
In fact, there's this thing called the circuit breaker, which is basically a rule that the SEC enacted after the 1987 Black Monday crash where the stock market crashed about 22% in a single day. And so the SEC created this circuit breaker rule that said, Hey, if the market ever drops more than 7% from the previous days' close, then the market's gonna halt for 15 minutes. That's a level one circuit breaker stop.
There's also level two stop at 13% and a level three stop at 20% since 1987. In those 34 years since 1987, that stock market circuit breaker has only been triggered five times. It happened once in 1997 and it happened four times in March of 2020. That's how crazy the crash was from a year ago. That's how steep and extreme the stock market crash was.
But that said, I don't think people really felt it that much for some reason, that's at least my impression, like I don't hear that much about the stock market crashed from, you know, just over a year ago. And I think that's partially because it was the time where we were basically all locked at home at the very early, like most uncertain, most extreme part of the lockdown, like the early days of the pandemic and the market was crashing.
But lots of other things were happening too. Like people were very concerned for their safety, people were concerned for the, for their jobs, for the economy in general, for the uncertainty of, you know, food availability and you know, all this kind of uncharted territory of pandemic that we hadn't seen the likes of in a hundred years. And the market, you know, in the background was crashing every day.
And the other thing about the stock market crash of a year ago is that it recovered very quickly too. And so, you know, I wanted to use this episode to basically take a look and see how that stock market crash, the Covid crash, we can call it from 2020 stacks up to other United States stock market in history. And so I have something to tell you about myself. I'm a nerd. I'm the kind of nerd who often spends hours at night pouring over spreadsheets, usually Google sheets, sometimes Excel.
Often what's in those spreadsheets is historical S&P 500 data. In fact, I went back and downloaded Robert Schiller's data who's an economist and he actually has stock market data for the US going back about 150 years. It's based on the S&P 500, although the S&P 500 was created in 1957. So he basically backfilled it going back, you know, another 75 years or something.
So you can have like a hundred years that's all kind of normalized to the S&P 500 to track the stock market performance of the United States. And so I looked at all of the stock market crashes over the last a hundred years. Why a hundred years? Well, because we have 10 fingers and 10 times 10 is a hundred and it's a big round number. The 1870s were, you know, when the market started, when this data started was a little bit sketchier.
So I feel like you know, the last 100 years is kind of more of the modern US economic history. And so I looked over the last 100 and I looked at anytime the market crashed at least 30% from the previous all-time high or not even crash, anytime it dropped, eventually dropped at least 30% from the all-time high. Why 30%? Well that's just another big number that I made up that, you know, includes the Covid crash but not so many crashes that we can't, you know, compare.
And the way I measured is, you know, whenever the market crashed at least 30% from the all-time high, I measured it down to the minimum it dropped and then I measured until it broke yet another all-time high. And so I consider that all one single crash. So if there were like multiple 30% crashes before another all-time high was broken, I didn't count that as counted that all as one crash.
When you do that, when you look at the data in that way, there are seven such 30% drops from all-time high in the last 100 years, one of which was the COVID crash of last year. So it's pretty unusual, you know, over the last a hundred years, there's seven, that's not even one per decade as you know, less than that because 10 of them would be one per decade.
By the way, if you drop that number to 20% saying, oh when has there been a 20% drop in the US stock market over the last a hundred years, that number doubles to 14. So it's actually 14 crashes of 20% individual crashes. But let's just look at the seven. So, and I basically wanna put in context how bad the Covid crash was, if it was that bad because as you may know, we've since recovered the stock market price, at least the S&P 500 price.
And we are again breaking all time highs. I'm recording this in mid May of 2021 and I think it's gonna air in early June. And so if something crazy has happened in the next few weeks, then you'll have to account for that. But yeah, we've had a, you know, a great run up since the bottom of the Covid crash.
So the first thing we can look at is basically how many times that stock market trigger the circuit breaker has happened. I and only three of the crashes. So let me at first give you this seven crashes, the seven crashes in chronological order, and I'm gonna name them based on the date of the all-time high right before the crash. So it's like the worst day to invest, you know, right before each of these crashes, if you were trying to time the market, which I don't recommend, by the way, if you listen to last week's episode.
So the first one in last 100 years was the Great Depression, 1929. So some in September of 1929. That was the first of the seven market crashes chronologically.
The second was the 1968 bear market, or I might call it the forgotten crash because we don't really hear much about this and doesn't really have a name of, you know, this was before my time. I was born in 1980. I definitely wasn't investing in 1968, but all my research, I haven't really found a good name for this thing except for some people call it the forgotten crash. So that was in, that started in July of 1968.
And then there's 1973 stagflation, or maybe it was like Nixon shock where there's like the Nixon impeachment or resignation. And that started in January of 1973.
Then 1987s Black Monday crash, which was the, you know, precipitating factor for the circuit breaker. That was in August of 1987.
Then kind of in the more modern era, like the time where I was personally an adult, there's the .com crash starting in March of 2000.
There was a 2007 financial crisis starting in October of 2007.
And then of course there's the COVID crash just last year, starting in February of 2020. Okay, so if we look at those and say which one triggered the circuit breaker the most? Well, only three of those actually happened after the circuit breaker existed. One of them was the because of the circuit breaker and turns out none of them caused the circuit breaker to happen except for the covid crashed, which caused it four times.
So in the .com crash in 2000 and the 2007 financial crisis, there was never a day where the market was down 7% despite it being down, you know, despite that having been four times in March of 2020. And you know, those two crashes were very significant crashes as I'm going to explain a second, but yet they never actually had as dramatic, as quick as volatile of a crash as the actual covid crash last year.
So let's look at the next metric, which is the total drop from the previous all-time high. So if you rank those seven, actually the smallest drop of those seven is the Covid crash where the market dropped 35.4% from like the all time high to the intraday low at the bottom of the Covid trough or whatever the Covid Valley.
And so it's 35% drop. The second worst was actually Black Monday, which is a 35.9% drop. Then in order it goes to the 1968 bear market, which is 37.3% drop. Then 1973 stagflation, which is 49.9. Then the .com crash caused the market to drop 50.5%. The 2007 financial crisis causes to drop 57.7%.
And then the granddaddy of them all, wait for this hold. If you're driving, you know, hold onto the steering wheel. If you're at home, you might wanna take a seat. The 1929 Great Depression stock market crashed. The market crashed 86.2%. Can you imagine having a hundred thousand dollars in the bank and seeing it drop all the way down to $13,800? That was an ugly crash.
You know, I mean that is the most extreme of the case, of course. Like this is only if you put all a hundred thousand dollars in the market on the day before, you know, on the perfect peak and then looked at it on the very part. And as most people do in their wealth building phase of their career, they're not just putting lump sums in and waiting, they're investing along the way.
So if you were investing during the Great Depression, you'd be buying a lot of that at very low prices and you actually would see like a magnification effect on the rebound, but yet still 86.2%, that's ugly. That has an ugly crash.
Okay, how about the speed of the recovery? So I measured each of these crashes in their total length from the previous all-time high to the next all-time high. So from the moment, you know, so for example, in the Covid crash in February is actually the week of February 17th, 2020, where the market was an all-time high. How many weeks before the S&P 500 eclipsed that high?
Well it turns out when you look at these seven crashes, the Covid crash was again the least bad. It was the shortest, it was the fastest recovery taking only 28 weeks or about half a year to recover. And as you know now we've since, you know, blown by those all times highs and we're once again enjoying this bull market that's going up and up and up. So the Covid crash was the least bad.
The second least bad again, was Black Monday. So it turns out that these very steep crashes like Black Monday and the Covid crash generally are less severe than the longer crashes, the longer bear markets. And they also have faster recoveries.
So the Black Monday only lasted 1.9 years. The 1968 bear market lasted 3.4 years before we saw another all-time high. Then next to the 2007 financial crisis was next at 5.5 years. The 2000 .com crash and the 1973 static were both about seven years. And then hold on to your hats once again guys, the great depression before the S&P 500, or actually the backfilled replication of that, the US stock market price from 1929 in September. It took 25.1 years to see those same prices of the S&P 500.
Can you imagine? 25 years? Wow. Although to be fair, this is just the share price. This doesn't include dividend reinvesting. If you included dividend reinvesting, all these timeframes would shrink just for ease of use. I was looking at, you know, share price, not dividend reinvesting.
All right, I know it's been a lot of numbers, I know I'm basically reading a spreadsheet off to you, but hopefully this is putting things a little bit into context in terms of how bad the covid crash was.
One last stat I want to give you is the trailing 10-year return after the crash. And so the way I did this since, you know, when you were in a crash, you don't know where the bottom is. You know, when we, when the mark goes down 30% last year there was a lot of people who thought it could go down way further or turned out that 35.4 was the moment of the most extreme drop and then it quickly rebounded.
But it could have been a 50% drop, like the .com crash or almost a 60% drop, like the 2007 financial crisis. But you don't know when it's gonna happen. So the way I looked at this was as soon as the market drops, 30% starting on that day. So if you're investing basically on the day like when you look at the market and you see that the market has dropped 30% starting on that day, what is the trailing 10 year return after that?
So basically if you're investing in the middle of the crash, what do you have to look forward to 10 years later? This while ago chronologically. So in 1929, if you invested after the market was down 30%, as we know when a lot further than 30%, your trailing tenure return was minus 46%. So that means if you started buying when the market was down 30%, even 10 years later, you'd still be down 46% of your money ugly.
Again, this doesn't include dividends, which back then were actually higher than they are now. And so that would make a big difference. I think you'd probably might be about flat if you include dividends. Because I think they're about 5% per year back then and you're down about 50% over 10 years. And so you, you would've been maybe about flat if you were reinvesting those dividends. But still, just in terms of share price, the share price was still 46% lower 10 years later.
Okay, how about the 1968 bear market? If you invested in the middle of that crash when the market was down 30%, 10 years later, the market was up 37%. Not bad, right? So you actually, you know, the market was up 37%. That's pretty good, right?
1973, same thing. 10-year trailing return plus 73% 1987 Black Monday plus 290%. So if you invested in the middle of the Black Monday crash, you know, you basically, the reason that number is so big is because the decade that followed was the nineties, which was the .com boom.
And so you would've held from 1987 through 1997 where the market was very high relative to the time it's much lower than it is now, of course, because the market goes up and up and up over time because it is collecting the full value of the profits and growth and revenue and innovation and population growth of the US economy.
But continuing in 2000, if you would've invested in the middle of that crash 10 years later, you'd actually only be up 14%, 10 years later. And the reason that is, is because 10 years later we were kind of in the middle of the financial crisis. And so there was this great recovery and then another crash that was just about exactly a decade later, if you invested in the middle of the 2007 financial crisis, 10 years later you'd be plus 167%, which is pretty nice.
And then for the Covid crash, we don't have tenure data yet because we're just over a year out of it. But actually through today or through, you know, may when I'm recording this, the market's actually up 78% from the middle of that crash.
So yeah, if you, in March of 2020 when it was all gloom and doom and everyone is saying about, you know, how the, the economy is doomed, if you started investing, then if you put money in the market, then you'd be up 78% through today. So actually six of those seven crashes are pretty significantly up if you're investing in the middle of a crash.
The last of course the Great Depression, that was ugly. Let's hope that doesn't happen again. So that's a little bit of context about the Covid crash and I, it was a very, very steep crash, but that was a very, very steep recovery. And so from peak to trough there was only 7th worst in US history. But it's important to note too, that even though that was one of the 7th worst crash in the last hundred years, and so we don't see crashes like that very often, but it was nice that we had a nice recovery.
And so what does this tell us about the future? What does this tell us about the next crash? Well, if you listen to my last episode, and if you haven't, I think you should because it's a good message about time to market, in my opinion, this really tells us nothing or at least nothing actionable, you know, based on what happened in the past. We can't know when to get in or out of these crashes, right? It's easy to try to draw parallels when you're looking at just the seven.
But, you know, I cherry-picked these, I went back looking backward and picked the seven worst. There were, you know, 14 crashes that were, you know, 20 to 30%. How do you know if the market drops 20%? If it's gonna drop more than 30%, if it's gonna recover?
Well, historically there's about a 50-50 chance it's a coin flip. If it's gonna keep going down or keep going up, we can't really know. And then there's, you know, probably columnists, I didn't do this step, but there's probably columnists like five and 10% drops. Are those on their way to a 30% drop? Or is that just a little hiccup that is gonna be totally forgotten by history?
We can't know looking forward, right? But what we do know is that, you know, what I did during the Covid crash is absolutely nothing, you know, and I have an Instagram account, personal finance club where I basically very transparently share my personal finances, including my, you know, bank accounts and brokerage accounts and things like that.
And you can go look in March 2020. And it was a very interesting time for me who as someone who's like a financial investing influencer because the market was going crazy and every single day I was posting, not doing anything, not selling, I'm buying like normal. I'm, you know, it's wild to watch. It's like watching a train wreck.
But you know, I'm not personally changing my financial decision and you know what, that has really benefited me. You know, in fact, you know, my net worth at the time I think was in the low three millions and now it's over 4 million just for doing nothing because the market is way up.
Since then, I was just still working my job, you know, investing regular, early and often and living, you know, just ignoring any sort of trades and to this day, and I think that's done very well for me.
You know, I think when you try to time the market or you try to like draw lessons from the past, you're more likely to hurt yourself than help yourself, right? And so for example, let's say in five years, you know, COVID 2024 shows up or something, you can't assume that that market will behave the same as this market because everyone at that point will have the knowledge of what happened five years ago, right?
And so we all know at this point the Covid crash had a very steep crash and a very steep recovery. So if you shortell the market right before Covid 2024 for example, there's no guarantee the market's gonna crash because maybe no one's afraid of pandemic market crashes anymore because the last one wasn't so bad when you consider the quick recovery, right? And so that's why I believe that the market is efficient, it has all the information that we have available to us priced in.
And this last crash was very steep because there was a lot of uncertainty. We didn't know how bad it was gonna be, if there's gonna be food shortages, etc. etc. It turned out that the market recovered quickly.
But next time it happens, the market won't behave the same because we're doing so with this new knowledge at our disposal as traders. So hopefully that put the Covid crash into a little bit of perspective historically relative to previous crashes.
By the way, if you didn't like hearing all these numbers I read at you and you wanna see a more visual look at these charts, I'll include those links at youstaywealthy.com/112. And you can also, there's also a link to Robert Schiller's historical S&P 500 data, if you wanna take a look at that.
So now I'm gonna go to our question of the day. Today's question is from Sherry from California.
Sherry: Hi Jeremy. My question is, what in the world should we do over here in California? Rent is outpacing mortgages, but the housing market is just ludicrous. Thank you.
Jeremy Schneider: So whenever I get this question about rent versus buy or should I buy or you know, am I gonna be able to buy, I think there's always some speculation built into it. You know, like is it a good time to buy? What if prices keep going up? What if I can never buy?
And so I think it's helpful to kind of look historically at the housing market. So if you look at the California housing market since 1980, the cumulative annual growth rate of the same sale, like the same home sale prices is about 4.86% per year. So that means every year the home prices have gone up about 4.86% nationwide. The nationwide average, that number by the way is about 4%.
So California, while the prices have increased more, it hasn't been crazy. But what that means is if you bought a hundred thousand dollars home in 1980, today that same home is selling for over $700,000. Ouch. That's a big number. But that's not that big of a number relative to what else the a hundred thousand dollars could have been doing.
For example, if you would've put that a hundred thousand dollars into my good old friend, the s and p 500, from 1980 to the end of 2020, the s and p 500 grew at a cumulative adjusted growth rate of 11.8% per year compared to the 4.8% that the housing prices grew.
So that means a $100,000 investment, the S&P 500 in 1980 is now worth over 10.5 million, right? That's bananas. And so while $700,000 is a big ouchie in terms of a home price, you know, the opportunity cost of spending that money on a home instead of investing it in a much more productive accumulating asset like the s and p 500 was actually much worse. And buying an S&P 500 index fund is virtually free.
You know, the expenses are low. In fact, fidelity even offers some 0% expense ratio index funds now, but homes ain't free. For example, you have to pay mortgage interest if you're buying a mortgage, you have to pay property tax, you have to pay property insurance, you have to pay maintenance and maintenance can be very expensive.
Because if you live in a home for 40 years, you're probably doing some remodels, you're probably replacing the driveway, you're probably replacing the roof and you have to do all that stuff. If you want to realize that full appreciation of the home price, right? When you include all that stuff, you know, that increase from a hundred thousand 700,000 might be nothing or very little, right?
But you're basically just getting your money out that you put into it. Whereas if you put a hundred thousand dollars into the s and p 500 index fund, you would have all $10.5 million, maybe minus some capital gains tax depending on what type of account it's in.
You know, an extreme example comparing a home and there's some, there's other, some other issues like, you know, much to my dismay, you can't live in an index fund. And also there are, you know, some leverage benefits of mortgages if you get a 30-year fixed mortgage, although the 1980 mortgage prices were like 15 to 18% or something, it's crazy.
But my point is that your home, whether you rent or buy, is an expense. Not only is it expensive to live there, but it's an opportunity cost of not investing your dollars outside of your home. And so to Sherry, my answer to you is it's expensive to live in California and I can't tell you if it's better for you to rent or buy. I don't know your whole situation.
Generally, this is the thought process that I walk through when deciding to rent or buy. First I would ask, are you debt free? If you're not debt free and you're not a homeowner, so you don't have a mortgage, but if you're not debt free, otherwise I would pay off your debt before you borrow more money for home.
Second, do you have 20% saved up for a down payment? If no, I would save it up before you buy, have that 20% down payment ready to go for your new home. Next question, do you plan to live there for more than five years?
If no, I wouldn't buy it. Turns out the math kind of gets pretty ugly when you're living in a home for a very short period of time because you have to pay realtor fees of 6% when you sell. So if you buy a house and then take a 6% bath on it later, that's not gonna be good.
Plus there's other expenses of, you know, moving and staging the house and all that good stuff. And then my last question is, do you want to be a homeowner? If no, then don't be a homeowner. You don't have to be, you know, there's no, there's no rules. Let's say you have to be a homeowner. It's not the only way to build wealth.
In fact, I think it's a pretty terrible way to build wealth as I illustrated with the difference between buying a primary home versus investing in a real investment like an index fund. If you answered yes to all those things, you're debt free, you've got a down payment, you wanna live there for five more years and you wanna be a homeowner, then for sure go for it. But remember, the thing that's gonna make you wealthy isn't getting this answer right of rent versus buy.
What's gonna make you wealthy is living below your means, living simply. And so if you can just buy less house, that's gonna make you much better off. If you're a math nerd and you really want to see how the math shakes down, and there are some extreme cases, I think basically in most of California, it actually makes more sense to rent right now, you know, home prices are so high and rents are high, but home prices are so high that you're actually better off renting, relatively speaking usually.
And this is why many, you know, long-term real estate investors don't like buying in California because they can't get rents high enough to, you know, rationalize the homes sale prices. But if you wanna see how it works for your location, you can go to the New York Times Rent versus buy calculator, which I will link in the show notes at youstaywealthy.com/112.
And you can put in your numbers and there's like tons of assumptions you have to make about insurance and appreciation of the home and what your rent would cost and all this, all these different things. But you can basically see how the exact math shakes out. But for me that's kind of irrelevant because the real important fact is just like spending less and then basically, do you want to be a homeowner and those other issues I mentioned.
So if you do want to, you know, you know, live in California, what are some options for you? Well, there's some cool things you can do, like house hack. You could, if you do buy, you could rent out a room. there's actually a new law that passed in California that allows for adding ADUs or additional dwelling units.
So if you could, you could convert your garage into like a, a finished apartment and rent that out or, you know, build a new structure in your backyard or something, rent that out and turn your home into a, a productive asset in terms of something that's gonna make money, you could move further away from the most nice areas in California.
I live, I actually do live in California. I live in San Diego. And yeah, if you're willing to drive 20 or 30 minutes, the prices get much cheaper than living, you know, very close to the beach. And you could buy a smaller home, you could rent for a few more before you buy.
I mean, you know, it's not romantic. I wish I could, you know, tell you the magic secret to living inexpensively in California, but a lot of people wanna live here and supply and demand exists. And so the more people who want the thing, the more it's gonna cost as people are competing for the limited resource.
But hopefully that gives you some ideas. And like I said, you know, the best thing you can do is just try to like lower your expectations in buying a home and live more simply and, and focus those investing dollars outside of your home to build wealth. So one day you can really buy a super nice home.
So that's all I have for you today. Thank you for listening. For the links and resources I mentioned here, head to youstaywealthy.com/112. Thank you Taylor for letting me fill in for the month of June.
Again, he will be back in July and I'll leave you as usual with my two rules of building wealth. Rule number one, live below your means and rule number two, invest early and often. See you next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.