Have we seen the bottom? Perhaps. But if not, and markets turn ugly again, here are three truths to remember
Is it time to get back in?
Over the past two days, three friends reached out to me, asking if it’s time to put new money into the market.
One of them I spoke with this morning was even agitated at not being a part of the Dow’s historic 11% rally on Tuesday, followed by more gains yesterday, and then today’s rally, up over 4% as I write. I could hear the fear-of-missing-out in his voice.
So, is the worst over?
Is my friend right to be frustrated, as we’ve already witnessed a substantial chunk of the recovery and we’re headed north from here?
Frankly, I hope so … but I have doubts. After all, we’re still missing so much information about the nature of this bear market.
For example, when will we see a peak in the number of COVID-19 cases, and what does that mean for the timing of reopening the economy? It’s one thing for Trump to say he wants things open again by Easter, it’s another to hit that target. And while the good news from New York City is that the rate of new cases is slowing, we’re seeing New Orleans cases exploding. So, COVID-19 isn’t necessarily abating, it’s simply migrating.
And even if we do reopen parts of the economy, what’s the scope of the damage that will have been inflected on specific sectors and companies? To what degree will COVID-19 have been an economic black-eye that will leave a nasty bruise yet eventually completely heal, versus a kneecapping that will take far longer to recover from, and perhaps leave a limp?
The numbers from this morning show that a record 3.28 million people filed for jobless benefits last week — nearly five times the previous record high. This is the first piece of solid data we’ve seen to measure the impact of COVID-19.
Now the question is how will it impact the bottom line of both Wall Street and Main Street? Leaping back into the market without knowing this is simply speculation — perhaps a speculation that will pay off, but a gamble nonetheless.
Keep in mind, it’s unlikely the COVID-19 drama will end in a black-and-white “phew, it’s all over!” fashion. Reports suggest that the illness could mostly disappear as we move into the hot summer months (apparently COVID-19 doesn’t do well in heat), only to reappear in a second wave in the fall. If so, that would follow the trajectory of the Spanish Influenza. If this happens, how would a second wave of COVID-19 impact our economy and markets?
These answers are all unknown.
So, let’s acknowledge they exist, but focus on what we do know. And in this case, that means highlighting three truths.
One, whether we’ve already seen the worst in the investment markets or if a far-deeper plunge is still ahead of us, this too shall pass. Two, COVID-19 is offering investors an amazing buying opportunity. Three, scaling in and thinking about “10 years from now” rather than “10 days from now” will relieve the anxiety of “where is the bottom?”
Let’s flesh each of these out a bit more.
***Keep calm and carry on
The stock market reminds me of one of those floor-anchored clown punching bags. You can knock it over, but it just pops back up. It’s impossible to keep down.
Think of all the “punches” the U.S. stock market has taken — and recovered from — beginning in 1900 and extending through today.
The graphic below overlays some of these events onto a chart of the S&P. Among them there’s World War I, the Great Depression, World War II, Vietnam, Stagflation, and the Global Financial Crisis …
Without exception, the markets have recovered and gone on to hit new all-time-highs.
Not once has “this time” been different. The market has always bounced back. And it will again … perhaps we’re seeing it happen today.
Did Monday mark the bottom of this bear market? It would be wonderful, and let’s cross fingers it did.
But if not — if the coming weeks and months see stocks lose, say, another 30% from here, just remember — this too shall pass.
So, if you own quality investments and you’re able to make ends meet financially without touching them, then just sit back and allow time to heal all.
Of course, if you do have some extra cash, then we have a different action step, which leads us to our second truth about today.
***COVID-19 has given us an extraordinary buying opportunity
Elite stocks rarely sell for a discount. It usually takes an external event — such as COVID-19 — to pull them back from premium prices.
As we just noted, the market always bounces back. But when a bull market suddenly becomes a bear, many investors forget this. They’re willing to let go of fantastic stocks for bargain prices.
But when you think about it objectively, world-class assets — factories, brands, buildings, patents, pipelines — these assets don’t become less valuable in a crisis, even though investors act like they do. They merely come with cheaper price tags. And that’s our opportunity.
As our CEO, Brian Hunt has written, “during a crisis, the only thing that changes about these valuable, lasting assets is who owns them.”
One way we can measure “great buying opportunity” is by looking at the dividend yield of various elite stocks.
Take a stock you likely aren’t considering … Emerson Electric.
Emerson is a Dividend Aristocrat. These are companies in the S&P that have paid, and increased, their dividends ever year for at least 25 consecutive years.
That alone puts Emerson in an elite category. But we can take it one step further. It turns out, Emerson is among a small group of Aristocrats that have paid and increased their dividends for 50 years. Think of them as the uber-Aristocrats. Through wars, economic downturns, and crises of all kinds, Emerson has carried on and continued increasing its dividend.
Now, below, we’re going to look at what’s happened to Emerson’s dividend yield during this bear market.
To make sure we’re all on the same page, as a stock’s price declines, its dividend yield rises. That’s because, assuming the company will pay out the same fixed amount of dollars in dividends (which Dividend Aristocrats do), then a lower share price per means investors pay less for the same amount of dividends. This increases the yield.
With that in mind, look at how this latest bear market has impacted Emerson’s dividend yield. Below is a 5-year chart.
Source: Ycharts
Over the last five years, Emerson’s average dividend yield has been 3.19%. Its max was a few days ago at 5.20%. As of yesterday afternoon, it was 4.16%. In fact, if we look further out to a 10-year timeframe, Emerson’s dividend yield has never been as high as earlier this week.
This is the type of opportunity that presents itself during a crisis.
(Note — we’re not necessarily recommending you buy Emerson today. It’s facing challenges given oil’s historically-low prices. But the company is absolutely worthy of your research.)
So, what’s on your crisis buying list?
As you consider that, ask yourself what companies are likely to be thriving 10 years from today? What companies have established assets like a brand, or some type of competitive moat, that will help the company rebound quickly as our economy bounces back?
The coming days/weeks/months will give you the chance to buy those stocks for prices you may not see for another decade.
And this leads us to our last truth — stop worrying about buying at the exact bottom.
***Market timing is for suckers
Unless you’re incredibly lucky, you’re not going to buy at the exact low (it would be great if that’s because we’ve already seen it). Fortunately, you don’t have to in order to make big returns.
The key here is adjusting your perspective.
As you consider buying into this market, the question to ask isn’t “could the market present me a lower price in the coming weeks?” but is rather “is today’s price one that will likely result in strong returns a decade from now?”
To illustrate the power of this mindset shift, let’s look at the financial crisis of 2008/2009.
Let’s say you believed a rally was coming, so you sunk a wad of cash into the market … at the wrong time.
You picked November 3rd, 2008.
As you can see below, you had another 30% loss ahead of you.
Well, if we fast-forward 10 years, your return was still 183% … and that’s including this 30% loss.
When you buy great assets and are prepared to hold them for a longer time-frame, it relieves you of the anxiety of nailing the bottom.
Plus, as we noted at the top of this Digest, another powerful step you can take is to buy into premium stocks in small allocations over a period of weeks and months. In other words, you scale in.
Our CEO, Brian Hunt, referred to this as the “Drip, Drip, Drip” method.
From Brian:
Instead of trying “time the bottom” and put all your money to work at the exact panic lows, I encourage you “chop up” your money into pieces and look to put one piece per week into the market over the next four or so months. That’s 16 pieces.
Gradually drip your money into the market. Buy a little every week or so.
Drip, drip, drip.
Just like the coffee makers of the past worked.
If you put your money to work this way, you will not put all your money to work at the bottom. You won’t get in at the exact lows. But you also won’t put all your money to work right before the market drops 8% in a day, putting you in the hole immediately.
Instead, you’ll gradually buy in pieces.
You’ll buy some of your total position near the exact lows.
You’ll buy some of your total position right before the market drops 8% in a day.
You’ll buy some near the average prices of the bottom. You’ll get a good “blended” average of the U’s prices.
As we wrap up, let’s cheer the rally over the last few days, while respecting the reality that there are still a great many unknowns in the market today. But we do know this will pass, it’s a great buying opportunity, and gradually buying into elite stocks is a powerful way to make big returns over the coming years.
Have a good evening,
Jeff Remsburg
