Although market crashes are scary and a tough test of your emotions, they usually present extremely good buying opportunities for the long-term investors that knows what they are doing and are willing to go against the majority.
However, despite the big crash we already seen (-28% from the last peak), should you start buying stocks now? Is the stock market crash over or there is still room to crash? How to know where we are now?
Is the Stock Market Crash Over?
As I am writing, the financial markets worldwide are having another one bad day after another and the generalized sell-off continues. In U.S. the Dow and S&P 500 keep falling one day after the other.
When will this stop or at least show any sign of stabilization?
We have way passed the bear market territory, with the S&P 500 down more than 30%, and investors are trying to figure out if the worst of the selling already took place or there are still bad times ahead.
Is the Stock Market Crash Over? The truth is that nobody really knows.
Needless to say, the big uncertainty here is the spread of the coronavirus and its negative economic impact that we are assuming it will lead to a recession. The downturn probably already begun, the question is how bad it will be and how we will cope with that.
While no one can exactly say when we will be at the market bottom, a signal that will have a huge impact is the coronavirus infections peak.
This crisis is first and foremost a health crisis and until we don’t get a health response, chances are that the situation will continue to get worse.
This chart shows the number of new contagions each day in the United States. You can find all the data here, also for other countries.
Before corporate earnings, economic growth or price-to-earnings ratios, investors are looking for data that show that coronavirus infections are in retreat.
A peak in daily infection rates is one of the things needed for a market bottom and it’s likely that the market bottoms after contagions slows.
In short, the situation really doesn’t look good and forecasts related to economic growth and corporate earnings all predict the market bear market to get worse. Furthermore, if corporate earnings were to decline (a very likely scenario) they would drive the index far below its current level.
Stock Market Sell-offs and Volatility
When talking about volatility, probably one of the first things that come to our mind is the CBOE Volatility Index (VIX). This index became a proxy for fear in the market and sometimes is also called fear index.
Stock market sell-offs usually coincide with sharp spikes of the VIX and right now the level of volatility in the market is crazy high, as high as the global financial crisis of 2008.
This is another sign that we are in the “middle of a mess” AND that those market movements are outsized declines.
Recognize the fact that volatility is already extreme for the market to suffer another big drop (double digit) in a very short period of time it would mean even higher levels, which are hopefully improbable.
The key takeaway here is that even if the world seems to be ending, when investors’ fear recedes, stock prices will rise, so keep watching the VIX.
A Look at History of Past Bear Markets
Although history never repeat itself, it surely rhymes. Past bear markets can provide us some sort of information on the type of declines that we might expect for the future.
The average bear market loss since 1929 averages from 35% to 40%, the last bear market for the S&P 500 ran from Oct. 9, 2007 through March 9, 2009 and the index lost 56.8%. in 17 months as the mortgage crisis triggered the credit crunch.
One thing about entering this bear market is that it was extremely fast and event driven. Now, although history shows that the faster an index enters into a bear market, the shorter they tend to be, we should consider the economic implication of prolonged lockdowns due to the spread of the virus.
Should I Buy Stocks Now?
You see what’s happening. The market is operating in panic mode with very huge ups and downs every day.
I guess there are discussions about what emotion prevails in the market right now: fear and uncertainty are the main driver of todays trading.
Here is the advice of one of the greatest investors in the world:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”Warren Buffett
The scenario that we are living in this period of time really resonate like a good time to test this advice.
This is really something to consider when thinking if it’s the case to get in the market now or not. Nick Maggiulli from ofdollarsanddata.com made a very interesting analysis showing that on average, if you buy when the VIX is higher, so are future returns.
Right now, with the VIX currently higher than 75, could be considered one of the best times to buy stocks than almost any other possible time.
In other words:
If you have cash to buy stocks now and you won’t buy, when will you? What’s your plan?
Remember that the best time to start investing was 10 years ago. The second-best time is now. We are now in a situation where you can prepare to get in the market according to your risk appetite.
So, my answer to the question “should I buy stocks now” is yes, BUT…
Beware of the fact that the market could crash even further as the economy deteriorates and you should be ok with that.
Chances are that if you are in for the long-term you are well set to cope with this potential scenario. A way to mitigate the risk of buying too early could be to progressively buy more as the market crashes, however that’s your choice.
In the end, keep in mind that we are progressively approaching the idea that “stocks are on sale” and at a certain point Wall Street will decide that stocks have become so cheap that they are a strong buy.
This is the time when we will have reached the bottom and see an inversion.
Another trick? Pay close attention to the news, when they will stop screaming all the way about a massive sell-off, chances are we reached the end of the bear market. Looks like we have to wait some more time for that.
Thanks for reading!
Did you like this article? Did you learn something new?
If so, forward it to someone that you think might be interested and check this page for more articles like this.
This article is for informational purposes only, it should not be considered financial advice. You can read the full disclaimer here.