With the S&P losing 10% in about a week, investors are scared — here’s how our experts are viewing it
From last week’s high through Thursday morning as I write, the S&P 500 index has now fallen 10% on fears of the widening impact of the coronavirus.
This officially registers as a “correction” at this point. And while losses of this size are within the range of normal, it can feel disconcerting nonetheless.
So, what are we to make of this?
Is this finally the beginning of a bear market? Or is this a buying opportunity for courageous investors? Or neither — is it simply an unexpected market event to ride out without any kneejerk portfolio-tinkering?
Here at InvestorPlace, we’re proud to feature some of the most intelligent, insightful analysts in the investment industry. Yesterday, three of them sent updates to their subscribers, commenting on the coronavirus fears, the related drop in the markets, and what to expect going forward.
So, in today’s Digest, let’s review how three investment pros are seeing the markets right now … and what that might mean for our own portfolios.
***The “human tragedy” that’s “unlikely to become a worldwide economic tragedy”
To establish some context, let’s turn to macro investing expert, Eric Fry, editor of Fry’s Investment Report.
The coronavirus epidemic has become a worldwide human tragedy, but it is unlikely to become a worldwide economic tragedy.
Certainly, the epidemic is a frightening event that is causing widespread suffering and anxiety. The deadly virus has infected more than 80,000 people so far and claimed more than 2,600 lives … and the tally grows by the day.
The virus has also sickened stock markets worldwide — causing more than $4 trillion of global stock market wealth to perish.
But if past is prologue, the swooning global stock markets will recover their health fairly soon and resume moving higher.
At this point in his update, Eric refers back to the SARS epidemic of 2003 and its effect on global markets. While fears at the time were also about a prolonged negative impact on stocks, those anxieties ultimately proved misguided.
Back to Eric:
The SARS epidemic of 2003 triggered a global stock market selloff. But that downturn didn’t develop into a worldwide bear market. Quite the contrary. The selloff produced a buying opportunity that would reward investors handsomely over the following four years.
Eric provided the chart below, noting how all the major stock markets were much higher on February 10, 2004 than they were on February 10, 2003 — the day the SARS virus first made headlines.
Does Eric expect a similar recovery here with the coronavirus?
This time around, stock market history might not repeat itself exactly, but it will probably rhyme.
Today’s coronavirus-inspired stock market panic is probably creating a buying opportunity that will reward investors over the ensuing year or two.
***Based on the coronavirus or not, market drops such as this one are actually par for the course
Stocks don’t go up in a straight line. And even years that post huge, 52-week returns can see specific weeks, months, or even quarters of frightening pullbacks. That’s simply the nature of the markets.
Our expert thematic investor, Matt McCall, editor of Investment Opportunities, made this point to subscribers in his update. He highlighted the reality that drops such as this are quite commonplace.
From Matt:
We need to remember that stocks experience pullbacks of about 14% most years. That includes both up and down years — and as you know, most years are positive.
The chart below from LPL Financial highlights the maximum pullback from high to low each year going back to 1980. Even some of the strongest years had double-digit percentage pullbacks.
My point here is that pullbacks are normal … and it is just as normal for stocks to rebound from said pullbacks. This time will be no different. The bears and financial media will lead you to believe it’s different, but they have been wrong every single time!
Here’s one more interesting stat for you: Each year there are three pullbacks of at least 5% on average. This is the first of 2020, and it probably won’t be the last.
Regular Digest readers know that Matt is bullish on stocks right now. In fact, he believes this new decade will see extraordinary wealth-creation through certain elite stocks.
But that doesn’t mean Matt isn’t prepared for, and expecting, bouts of market weakness — in fact, more weakness than what we’ve seen recently. But when you expect this, you can avoid being rattled by it.
Back to Matt:
As you already know, I am very bullish on 2020. In fact, I am bullish on the entire decade … But I am also a realist. I can say with confidence there will be several corrections over the next 10 years. I think the odds of a correction this year are above 50%. By correction, I mean a 10%-20% drop in the market …
This brings me to investing versus trading. It’s a critical distinction, and the biggest mistakes are made when investors forget the differences.
Investing involves owning stocks for the long term and weathering the 7% pullbacks and even bigger corrections. Every long-term investor will live through many corrections and likely a few bear markets …
The biggest mistake average investors make is that they suddenly become traders when the market pulls back. Selling today and then trying to get back in later when stocks are lower makes sense on paper. In reality, though, it rarely — if ever — works.
Matt sums up his position by again taking a big-picture perspective:
We are in stocks to make big money over years, not days, weeks or months.
In that context, selling into a 7% pullback is not the best strategy. As hard as it is to read the headlines and watch stocks fall, selling now and missing out on what could be the best decade ever for stocks will be a lot harder to watch.
***That big-picture perspective is important to remember, but what might we expect over the near-term?
For that answer, let’s turn to our expert technical analysts, John Jagerson and Wade Hansen, editors of Strategic Trader.
What do historical market data tell us about how stocks have responded to big, fast drops like what we’ve experienced over the last several days?
From John and Wade:
Over the past 10 years, there have been 78 one-day declines that exceeded 2% and over 75% of those instances led to positive returns over the next month. So, we should be careful about getting too bearish too soon.
Further, we have observed that when a selloff drops the S&P 500 to a key support or pivot level, the likelihood of a bounce over the next 30 days is even higher. Unfortunately, we think it’s unlikely that the current level is that pivot point, so the S&P 500 could drop further before finding support.
As you can see in the following chart, if there is more selling, the nearest firm level of support on the S&P 500 is 3,020 or 10% below the highs. That’s bad, but it would still only be half the decline that we saw in the fourth quarter of 2018 or the third quarter of 2011.
While the current disruption is frustrating, it isn’t worse than what we have already experienced — and profited from shortly after — during the bull market.
Daily Chart of the S&P 500 — Chart Source: TradingView
So, summarizing the shorter-term trading perspective, what are John and Wade expecting from the markets?
Being a bull when everyone else is terrified is usually a pretty good strategy, so we are still maintaining our positive bias …
We are waiting to see if the market confirms a bottom this week. Because the selling is within historical norms so far, we aren’t overly concerned, and we plan to leverage our income strategy on any short-term support bounces.
Watching the markets fall like they’ve done over the past week is never easy. But it’s important to view it in the right perspective.
Though no one saw the coronavirus coming, this current market correction is normal. It’s well within the range of average market volatility. If anything, it’s an overdue breather for a market that’s been legging higher for months.
So, while uncomfortable to sit through, the effects of the coronavirus are no reason to change your long-term market approach.
Of course, if something material happens that changes this diagnosis, you’ll hear about it here in the Digest.
Have a good evening,
Jeff Remsburg
