The coronavirus crisis hit the market and the S&P index is heading steeply down. Wednesday 18 March, the worst day so far hitting 2,288 points. It means plunge 32% compared to the February all time highs 3,386 points. Therefore, I decided to make further purchases following my strategy of buying all way down. I am currently 40% stock and 60% cash. So I am prepared for deeper fall. In my opinion, it is not possible to time the market and so I do not even try. Instead, I focus on stocks that are at least little bit immune to crisis and have a strong and sustainable dividend. As an example – pharmaceuticals (JNJ, MDT, MRK, PFE), food (ADM), beverages (KO, BUD, DEO), some technologies (CSCO, IBM, QCOM), delivery services (UPS, Detsche Post), paper and related products (KMB) or telecommunications (AT&T). I avoid other stocks for now, with the exception of banks (WFC, JPM), as I believe they are better prepared compare to last crisis.
However in the current unstable environment, I don’t want to give any tips on specific stocks like I did last time. Yes, I admit that I did not expect such a brutal consequences of coronavirus. Therefore, I recommend you guys to perform decent due diligence on specific titles yourselves. The stocks mentioned above are just examples of the shares I am slowly buying now. However, for risk averse investor, I would recommend waiting a while until the situation calms down. Personally, I never had a problem with taking risks (I guess that’s why I play poker), and that’s also why I still see some companies as a great opportunity to buy at a discount, even though I may have significant losses in short term. How long it can take and how far market may plunge? Let’s check out the history of the bear markets.
Few facts about the bear market
- We’re now 30 days into the 2020 bear market
- The typical bear market lasts about 2 years
- To date, we’re down 32% from the top on February 19th
- The typical bear market is down 40%
- The typical bear market takes 2.9 years to recover
- That 2.9 year average excludes 1929, which took 25 years to recover
- A 40% market drawdown would take the S&P to 2032 points
There is so much uncertainty out there that forecasts are essentially useless. That’s why I’m drawing on history to at least set some kind of expectations. In these extraordinary times, even skilled and experienced investors are falling into the emotion trap. I recommend you not to go down that road, because you will look back at today and regret the decisions you made that were based on fear and panic. The speed and plunge of this bear market is unprecedented. I can’t find another example where the market dropped by 32% in a single month. If you know of one, share it in the comments below.
A new recession is virtually guaranteed to hit us this and next quarter, if it hasn’t already started. In a recession, the market usually begins to fall about 4 months in advance. The good news is that the market tends to stabilize and move higher several months before the recession ends.
Here’s the big question: has the market already fully priced in the effects of the recession? I don’t know, but I think the odds are that it hasn’t. That’s why I think we are heading for 2000 on the S&P index, maybe even deeper. Whether 2000 will hold is largely up to governments.
Chart of the 1929 bear market
This was the worst bear market in the history of US markets. I’m not saying that our current bear market will be as bad as the 1929 one, but it happened then, and it could happen again, especially if the governments get things wrong as they did in 1929.
Chart of the 1973 – 1974 bear market
This bear was particularly nasty for a few reasons. One, it took 7.5 years for investors to recover. Two, there was several ups and downs, which frustrated those who were trying to figure out when to get back in. And three, it happened during the impeachment and resignation of president Nixon, which was a rocky time for everyone. Moreover, it led to the hyper-inflation caused by the price of oil.
Chart of the 2000 – 2002 bear market
Some investors still remember the tech bubble in 2000 and the bear market that followed. But my question is this: have they learned from it? I’m not so sure, because today (prior to the most recent crash) investors were bidding up the prices of the same kinds of tech companies that were overvalued back in 2000.
Chart of the 2007 – 2009 bear market
Aside from the crash of 1929 and the Great Depression that followed in its wake, the bear market and global financial crisis of 2007-2009 was the worst. Investors, citizens, businesses, and the government were rightfully worried that the entire financial system might collapse.
We face the same worries today. With so much uncertainty about the effects of the pandemic, and the drastic measures taken by the Fed, investors and citizens are worried about a complete health and economic meltdown. It’s a clear and present danger, but I believe that the odds are very low that this will happen.
That is the reason I am writing this article. If you expect the worst scenario, you will make mistakes with your investment decisions. Plus, your stress level will go up, which makes you more vulnerable to catching the virus. Remember, there the is always light at the end of the tunnel. It is clearly visible from the charts above. So much today for stocks and history of bear markets. It is not the most important topic anyway. Most of all, I wish you and your beloved once to stay healthy! Hopefully it will be over soon.
Picture source: Forbes.com
Text source: Seekingalpha.com
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