I’ve been getting this question a lot over the past two weeks. As you might imagine, it’s not an easy question to answer. Many of us have become accustomed to expect stocks to bounce back quickly after sharp declines. Buying the dip over the past 10 years has worked out quite well. However, historically a buy the dip strategy has not yielded the results experienced over the past 10 years or so. Over a 90-year period, buying the dip would have resulted in a complete loss of capital. In other words, a dollar invested would have basically been wiped out.
With that in mind, I want to attempt to answer the “is it time to buy?” question.
If you’re sitting on cash, have a long time horizon and are okay with prices dropping say another 10-20% then maybe it’s a good time to buy stocks. In reality though, the acuteness of the uncertainty we face is greater than normal. We still don’t know what the full ramifications of shutting down our economy will be. A lot of people are out of jobs. A lot of businesses will likely be forced to shut down. The consumer, the main driver of the US economy, is severely impaired right now and will be for an uncertain period of time. The breadth of the impact of the current situation is likely to be far more reaching than during the Great Financial Crisis in 2008. What that means is uncertain but we haven’t experienced an economic standstill like this since the Great Depression. I’m not saying this will end up being a depression but it’s not a zero probability.
The Elephant in the Room
The other element to the current situation is COVID-19. While all efforts are focused on limiting how many people contract the virus, the all clear sign will most likely be when the number of infected people peaks and begins to decline. Hopefully all of the social distancing and shelter in place orders will lead to that happening sooner versus later.
So my answer to the question is maybe with a leaning towards no. I can’t help but wonder if the recovery from this current episode will occur over several years versus several months. Is it possible we’re entering a secular bear market? I don’t want to get ahead of myself here. For all I know, we could experience a V-shaped recovery and get back to, or even exceed, the historical levels we were at just a month ago. However, I’m not so sure that is going to happen and I think it’s too early tell anyway.
Something to Consider
Stocks are oversold, no doubt about it. As a result, we may experience a rally at some point in the near future. In the fourth quarter of 2008, the S&P 500 had trough to peak returns at different points during the quarter of 11.6%, 18.5% and 24.2%. However for the index’s return for the quarter was -22.2%. Furthermore, the index declined another 27% before bottoming out in early March 2009. That’s a lot of volatility. If you think you can time that in a way to where you can make money, then more power to you. HINT: It’s really hard to make money with those kinds of swings in prices. Coming back to where I started with my answer, unless you have a long time horizon and can stomach further downside, you probably don’t want to buy right now. You shouldn’t sell either.