Calling A Bottom

The markets just experienced the 2nd worst day in 124 years on Monday (March 16th). The VIX (fear index) closed at its highest level since it was incepted in the 80s. This past month the stock market experienced the most rapid crash in history.

The S&P 500 plummeted roughly 30% from its highs last month. It will likely continue to slide until we see some positive headlines on either substantial fiscal stimulus or a rapid decline in new coronavirus cases.

President Trump addressed the nation during the last 30 minutes of the trading day on Monday and said that this virus could be an issue until July or August. This further escalated the market’s recession fears. If this pandemic becomes a multi-quarter issue, this will undoubtedly incite a global recession. The Dow tumbled a historic 3,000 points into Monday’s close.

The markets are already pricing in the worst-case scenario. During the financial crisis over a decade ago, the market declined around 55% from their highs over the course of 1.5 years. The major indexes are all more than halfway there in just one month.

The market’s record dive speed is due in part to algorithmic trading models that have taken over the financial markets. Computers are assessing risk and making hyper-fast trades based on these formulas autonomous. This autonomous computer-driven trading is what led to the flash crash in 1987 when these immature programs weren’t correctly calibrated and crashed the markets. Today these programs are much more sophisticated and are quickly calculating risk/returns scenarios and making trades of this in real-time.

Recession?

At this point, the markets are seeing a recession as a forgone conclusion. The S&P 500 is 30% off its recent highs, the Fed dropped interest rates to zero, and our overly bullish president proclaimed that this pandemic might have a longer timeline than initially anticipated.

The good news here is that we are already pricing in the worst-case scenarios, and the market may not have much more room to fall even if a recession was imminent.

The 2008 financial crisis was a systemic issue with our economic structure that had long-term rippling effects on every corner of the economy. The novel coronavirus is only creating short-term problems that should quickly resolve themselves once the virus is controlled, and business is able to resume as usual.

Calling A Bottom

Traders are always trying to call a bottom and a top to every market scenario, and the few that accurately predict these levels accomplish it with little more than luck. We could pontificate when this bottom will be hit, but the most productive thing you can be doing with your cash right now is to begin buying high-quality blue-chip stocks at discounted levels. Like I said, we are trading at a 30% discount to what we saw just a month ago, and the stock market will recover as it always has. Now is the time to start upgrading your portfolio, and price averaging down on the market’s top stocks is going to be the most effective strategy.

I am looking at companies with healthy balance in industry that are not going to be substantially affected by this virus. The stocks that I am looking at include Microsoft (MSFT), Facebook (FB), and Alibaba (BABA).

Other companies outside of tech that I am looking at with a strong growing dividend and a proven track record include Johnson & Johnson (JNJ), JP Morgan Chase (JPM), and Home Depot (HD).

Take Away

Volatility in the markets is at a high, and so is uncertainty. I suspect that this volatility is here to stay until this pandemic can be controlled. The coronavirus is still picking up steam with 163 countries effected and 15 with over a thousand reported cases. There are still likely thousands of unreported cases out there.

The extreme measures that are being taken combined with the approaching spring gives me confidence that this virus could be under control within the next couple of months. The two potential “bottom triggers” that I am looking for are a substantial fiscal stimulus and a sizable decline in new COVID-19 cases.

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Microsoft Corporation (MSFT): Free Stock Analysis Report
 
JPMorgan Chase & Co. (JPM): Free Stock Analysis Report
 
Johnson & Johnson (JNJ): Free Stock Analysis Report
 
The Home Depot, Inc. (HD): Free Stock Analysis Report
 
Facebook, Inc. (FB): Free Stock Analysis Report
 
Alibaba Group Holding Limited (BABA): Free Stock Analysis Report
 
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