The bull market, which showed no signs of slowing at the beginning of the year, was stopped in its tracks last week due to the coronavirus pandemic.
Stocks ended their historic 11-year bull run last week after closing by more than -20% lower from their all-time highs just 4 weeks earlier. For perspective, this is the fastest we’ve ever seen a bull market turn into a bear.
The U.S. was arguably in one of world’s strongest economies prior to this, which makes it all the more likely that we will bounce back in record time. When the worst is behind us, stocks are expected to soar as pent-up economic demand is unleashed.
That’s why now is the time to put your wish list together and start buying your favorite stocks at discounted prices that were virtually unimaginable just a few weeks ago.
Buying stocks today will bring fortunes tomorrow. This bear market will pass, as they always do. And the inevitable bull market that follows could usher in big profits for those who see this pullback as the opportunity that it is.
We’ve heard it a million times before, “Buy the dip!” Why is it so hard to do? It’s Armageddon out there with stocks falling, businesses boarded up, and everyone hunkering down for atleast the next two to eight weeks. It may not feel like it today, but soon enough everyone will realize that this was a great time to buy stocks. I will go through a few charts here to show why over the long run, this too shall pass.
Big Spikes in the VIX
One thing that separates the professionals from amateur investors is their grasp of the VIX. Without getting into much depth, the VIX is a measure of the S&P 500s expected volatility over the next thirty days. It’s measured by using the variance of S&P 500 options. The higher the VIX, the more uncertain market participants are about the near future of the S&P 500s range. High levels of the VIX coincide with major market volatility. Afterall, that’s why it’s called the Volatility Index.
Let’s look back to periods when the VIX traded at extraordinarily high levels. Below is a chart of the VIX going back to 1991, including today’s intraday level over 80. The current spike is the highest spike since November 2008 – the depths of the Great Recession.
Back in November 2008, the S&P 500 traded between a high of 1,007 and 747 – a monthly range of 30%!. Obviously, for long term investors, anywhere in that range was a fantastic buying opportunity. For those investors who plugged their noses and bought stocks back then, it took nine months for stocks to get back to breakeven! While nine months may feel like an eternity for investors that are down, it’s a blink of an eye for retirement accounts.
Let’s ignore this extraordinary VIX level we are seeing now. What about the more “regular” VIX levels where the index shoots up to over 40? The table below shows the month in which the VIX first shot to over 40, and where S&P 500 levels were at the time of the spike as well as 1-month, 3-months, 6-months, 1-year and 2-years later.
The data limits these dates to the first time VIX surpassed that level for the month. Otherwise, we would have six months of dates beginning in September 2008.
The big takeaway here is the healthy bounce. There is only one instance where the market is down 1 year after VIX 40. That happened to anyone loading the boat the day the market reopened after 9/11. A year later, the market had given up another 25%. Two years later, however, the market was up 17.45%. On average, over the next two years, the market adds over 12%.
Even the short-term outlook looks solid. The market is up about 3.75% in the month following the VIX hitting 40. It is obviously too soon to tell how the late February breakout of the VIX will go down in history.
The Great Recession: Then vs Now
Think about what was happening at the time of the Great Recession and compare it to the current day. There was no light at the end of the tunnel during the Great Recession. The world had no idea when or if the market would emerge. Entire nations were on the brink of insolvency. The financial crisis roiled markets as counterparty risk emerged. It took unprecedented global central bank intervention to avoid depression. The good news for the market now is that central banks learned from their mistakes of waiting to respond. Now everything is happening lightning fast. Fed chair Jerome Powell moved swiftly to not only cut interest rates dramatically down to zero, but also provide banks with $1.5 trillion in liquidity. The Fed is acting as a neeed backstop to prevent a global credit freeze.
Also, we know this will pass. The coronavirus has caused a widespread panic. Some feel it’s justified, others feel it’s not. Either way, it’s happening and denying it is not going to make us any money. Regardless of where you stand on the spectrum, one thing is certain; one day the restaurants will open back up and the world will get back to business as usual.
Opportunity is knocking. With a long-term outlook and a little bit of smarts, investors can position themselves to benefit greatly the next time the market gets back into high gear. Before you know it, we will be back riding at all-time highs.