After back-to-back days of 3% declines, I understand why most investors are nervous about their portfolios. Add in the constant headlines regarding the coronavirus and the fear spikes even higher.
That’s what we need to talk about today. I want to insert some logic and perspective into the current frenzy.
Let’s start with the stock market. The S&P 500 began today down 7.6% from its all-time closing high last Wednesday. When stocks fall sharply in such a short amount of time, it tends to feel much worse than if they slid that same amount over a few months. Unfortunately, in the connected and instant information world we live in today, pullbacks are often violent and fast.
But… stocks can rebound just as quickly. They usually do.
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! (More on that in a moment.)
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.
Think Big Picture
As you probably know, I am very bullish on 2020. In fact, I am bullish on the entire decade – what I already refer to as the Roaring 2020s.
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.
If you read my “10 Fearless Predictions for 2020” article, you know that I believe the S&P 500 will be up at least 20% at some point this year. In the very same report, I predicted there would also be a correction in 2020. As I mentioned, the average drawdown in any given year is about 14% – right in line with a typical “garden variety” correction.
And remember, the chart above shows that most years stocks are higher, even when they experience a correction.
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.
A successful investor will not sell into any panic driven by headlines.
A successful investor will view pullbacks and corrections as great buying opportunities to get into quality companies.
A successful investor will attempt to put emotions aside and avoid the “I’ll sell now and buy back in lower” strategy.
Then there are the traders. Traders loves this type of volatility because they can make big money in a short period of time. The key, of course, is being on the right side of the trade.
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.
I have been in this business going on 20 years now. I have dealt with two major bear markets and my fair share of corrections. Most investors who attempt to time the market during a pullback sell and then aren’t sure when to buy back in. They stay on the sidelines when stocks turn around and end up paying more to get back into the market. I have seen it too many times to count.
To truly build wealth, you want to be an investor. You want to be 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.
Fear Is Spiking…
Most pros keep an eye on the CBOE Volatility Index (VIX), which is often called the “fear index.” It is a measure of volatility based on options on the S&P 500.
Between Friday and yesterday, the Volatility Index spiked 63%, clearly showing the panic among investors. The index hit its highest level since December 2018, when the S&P 500 pulled back 19.5%.
There was a similar spike in the VIX in February 2018, when the S&P 500 pulled back 10%. And prior to that, the VIX last reached current levels in January 2016, marking the end of a 12.5% pullback in the S&P 500.
Here’s why that’s important: Each time the VIX shot up to current levels (Above 29) turned out to be a great buying opportunity in the market.
There is an old Wall Street adage that says, “When the VIX is high, it’s time to buy.” Not all adages are accurate, but this one is. The current spike is no different than past ones. This is a great long-term buying opportunity.
…But Ignore the Media
Big down days are golden for the financial media. CNBC ran its special, “Markets in Turmoil,” each of the last two nights. They pull it out and dust it off when things get bumpy.
I found a study on Twitter that showed stock market returns after CNBC runs its fear-mongering specials. And as you might imagine, CNBC is the best contrarian indicator for buying stocks.
Going back to May 2010, the stock market was up 75% of the time by an average of 1.4% just one week after the “Markets in Turmoil” special airs. Looking out over three months, the market was up 96% of the time with an average return of 6.9%. And one year later, stocks were up every single time with an average gain of 20.7%.
I love that study. We can add a new adage to Wall Street’s lore: “When CNBC’s frenzy is high, it’s time to buy.”
As many of you know, I was on television with Fox Business and Fox News for a decade. I saw what goes on behind the scenes and know exactly how these billion-dollar media machines work. It’s pretty obvious they don’t care about you. They care about one thing – eyeballs. How many people they get to watch or read their content. The more eyeballs, the more advertising money. It’s a simple business model, but there is no incentive to look out for the viewers’ best interests.
Let’s go back in history and see how the media portrayed another scary health situation – the Ebola virus in 2014. Here are a few front-page headlines from late October that year when the Ebola scare was sweeping the globe.
CNN went as far as saying, “Ebola: The ISIS of Biological Agents?”
I was co-hosting a show on Fox Business at the time. On October 1, 2014, we discussed the outbreak live on air. As you can see in the beginning of the clip below, I said that airline stocks were the cheapest they had been in years. Everyone was saying to sell the airlines because Ebola would crush the industry.
United Airlines traded at $45.47 that day. Less than four months later, it had climbed 61.9% while the Dow Jones U.S. Airlines Index had rallied 50.8%. The one sector that everyone thought would be hit the hardest by the Ebola breakout was one of the best performers over that time. The S&P 500 gained 5.7% during the same timeframe, so United Airlines outperformed by more than 10X.
The Roaring 2020s
As you know, I am very bullish on the market and will remain so until something fundamental shifts and changes my long-term view. The coronavirus scare doesn’t do that. My 10-year outlook remains as bullish as ever.
The convergence of multiple life-changing technologies coming together will unleash one of the greatest money-making opportunities of our lifetime. The next decade will go down as the Roaring 2020s in the stock market.
Remember, the 1990s saw several pullbacks that shook investors out of the market. It ended up being the greatest decade in history, but it had its share of scares.
The chart above shows all of the pullbacks during the tech boom of the 1990s. A 10% dip to start the decade was followed by a 19.5% correction, several pullbacks of about 7%, then another 18% decline, followed by a 12% correction in 1999.
That’s a lot of pullbacks. And yet the message is very clear: Investors strong enough to hold through the times of selling and dire headlines made a lot of money – I’m talking 316% in the S&P 500 and 795% in the Nasdaq Composite.
I know we covered a lot today, but this is important information that I hope will help you make the best decisions for your investments. I also hope you feel a bit of relief and reassurance that things are okay. This type of action, as horrible as it feels, is the norm when it comes to stocks. But remember, so are recoveries that take the best stocks to new heights.
My team and I are here to help you along the way and to keep your eye on the big prize. It’s just as big as ever.
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