Clearly investors are panicking. Virtually all of the stock market investment theories are founded upon an assumption that investors are rational – that is a joke. Modern Portfolio Theory assumes that investors are risk-averse, meaning they will only take on additional risk if they expect to get additional return. When the market is “good” meaning it is going up consistently, investors assume unwarranted risks totally out of scale with the potential returns. The higher the overall market goes, and the higher valuations on individual stocks become, the more unwarranted risk investors assume. This is the classic situation we see in a market bubble. It happens often – we just had one immediately before the current correction began.
Likewise, as we are seeing now, when the market suffers a severe correction, investors ping pong from risk-loving to complete risk avoidance – they just want out regardless of the losses they will suffer, and regardless of the valuations of individual stocks or the market overall. There is nothing rational about this behavior. Investors are people, and people are emotional, especially when they are losing money (even if those losses are only on paper).
If you are not a short-term trader, but instead are an investor and not a speculator, you may not see another opportunity to buy stocks at these valuations in your lifetime. I know that is a bold statement, but the market conditions we are experiencing are extremely rare. Wide spread panic causes opportunity. The old adage – buy when there is blood in the streets is applicable. While that is a war reference, it still informs.
We are seeing some of the highest quality companies getting knocked down 15 to 20 percent per day in some cases. These companies are not going out of business, even if we were to have a sever recession. Further, it is highly likely that one or more of the drug companies working on a vaccine or another drug that will effectively address some of the symptoms will find a solution in the near-term. Regeneron and others are already making material progress. While there will certainly be significant, negative impacts on the economy, and on corporate earnings, I do not believe the effects of the coronavirus will drive us into recession. We were headed for a recession before the outbreak, and if anything, I feel that the disruption in the economy will be followed by a period of sharp and sustained spending, which will delay a recession.
We were likely to have a recession, starting in the second half of 2020 and lasting into 2021, perhaps through 2021 into the first half of 2022. I believe we will have two, possibly three quarters of negative impacts from the coronavirus, followed by a strong rebound, which will delay the recession we would have had for at least two quarters. This means that a recession that could have started in the fourth quarter of 2020 will not begin until sometime in the second half of 2021. In this interim period, between now and when the recession eventually starts, stocks should experience some very strong gains. This will be especially true for those areas of the economy that have been the hardest hit – restaurants, travel-related companies, and oil.
There is another old stock market adage- don’t catch a falling knife. I think that has been true during this correction and I probably am guilty of it – I went into the correction with 100% cash for my clients, and started buying around 2,750 for the S&P 500. While I wish I had more cash (if I did I would invest it today, right now), one virtually never invests at the exact bottom, and if one does, it is pure luck. I have been doing this for more than 30 years and it is extremely rare, in my personal experience. With that stated, I did call the exact bottom of the market immediately following the 2008/9 financial crisis – 666 intraday on the S&P 500 in March of 2009. I published an article that day stating that it was the right time to buy, and I did buy on that day. Today is like that day. It may not be the exact bottom, but the valuations for many of the highest quality companies represent that kind of rare value.
To digress a bit, one of the differences with investing today is the proliferation of online, cheap trading platforms. In the past, most investors worked with a broker instead of investing their own money. And, while I have known many brokers over the years, and not all of them have been ethical, professional, or even competent, for the most part, they had experience and were less susceptible to emotions. Here is a third old adage – a defendant who represents himself has a fool for a client. This is a legal reference, but it is equally applicable to investing. I am not trying to insult anyone, and there are plenty of individuals out there who are non-professionals who are capable of making sound investment decisions. But the trust is that most people are not. Most people are woefully inexperienced, do not have the skills, education, or knowledge required to do the proper research, and are highly susceptible to emotion. In short, they have no business making investment decisions.
As I have noted in other articles, market conditions have fundamentally changed. The bull market we experienced from 2009 through 2019 is over. Buy and hold strategies that worked well during that period will not work going forward. Anyone who wasn’t at least partially in cash before the correction started should realize the truth of this statement. Going forward, investing is going to be a lot more challenging, so to do it properly, investors are either going to have to invest the time and effort to become well-educated and skilled in it, or they are going to need help. Those who continue using a buy and hold strategy are going to find their returns to be disappointing. Those getting close to retirement should feel a greater sense of urgency to identify a strategy that makes sense in the current investing environment, and what is to come over the next 5 to 10 years.
The main point I would like to leave you with is that I don’t know where the bottom of the market is, but it doesn’t matter. Stocks are attractively valued, and many of the companies that have been hit the hardest represent the best opportunities. If you are a long-term investor, you may not see a better opportunity to buy great companies at these attractive prices. The last opportunity we had was in March of 2009. Many of you may be retired before we see another opportunity like this. If you feel you are not capable of making a rational decision because you are too emotional, hire a professional. Everyone wants a “good deal” but sometimes you get what you pay for, or to put it another way, if you don’t pay, you don’t get what you need. The S&P 500 is down 30 percent from the high. It may be worth paying a professional 1 percent or so per year if they can help you avoid taking this kind of drastic loss, and if they can help you take advantage of buying opportunities instead of letting emotion keep you on the sidelines while the stock market recovers.