he further along a bull market runs, it is only natural to wonder “when will it end” or even “how will it end.” At the end of the first quarter of 2020, the bull market is over, and I’d bet dollars to donuts that not many saw a virus being the source of the undoing. Actually, I should say, the actions taken as a result of this virus, is the source of the undoing of our beloved bull market.
Over the first three months of the year, the stock market (as measured by the S&P 500 Index), was up nearly 5% at one point. Then saw a rapid decline to a low of -30% (down 35% from the all-time high). Only to finish the quarter at down 20%. The kicker, this rollercoaster occurred over only 29 trading days. Needless to say, volatility is in full force! The question is, is it warranted?
We’ve discussed at nauseum that uncertainty is the stock market’s perceived worst enemy. Investors become quite uncomfortable when they don’t have a clear picture of the future of the economy. But… a 35% move down over 29 days! This seems quite extreme. Could it be a sign of the times… the current environment we now live?
Even compared to the last bear market (the Great Recession of 2009) the 24/7 news cycle (I use that word loosely) is way more amplified. Back then, Twitter and Facebook were a shadow of what they are today. More and more Americans are stock market investors via their participation in 401k’s and 403b retirement accounts. So not only is the news everywhere, everyone has a vested interest. In a volatile stock market, this may be a recipe for disaster. Even the most seasoned investor can get caught in the hysteria.
As long-term investors, we recognize the gravity of the current situation and the myriad of potential results in the short-term, but we also need to revisit why we are invested in the first place. We accept the short-term volatility of the stock market for its long-term growth potential. As we laid out, the volatility was fast and furious (and remains so). No doubt, scary for most… but when we focus on the future, this bear market has rather quickly, produced investment opportunities we have not seen in 3 – 4 years.
For us, over the period of two weeks in March, we estimate we made as many trades as
we typically do in a year’s time. This was driven strictly by prices of some of our favorite stocks trading down 30%+. It only makes sense that if we thought Starbucks was a good value at $90 a share, we were pinching ourselves when it dropped to $56 a share in a month’s time. Right?!?! Yes, business will be slowed when you can only drive-thru to get your latte… but we sort of have an idea that this won’t be the case forever.
There are more than a few examples such as Starbucks (i.e., Nike was trading at $62, down from $103). And we expect the same for those investments… that over time, they will be worth more than they are today. In fact, I stumbled upon this great chart to the right. Depending on how low the stock market drops, over a 5-year period, the odds are in your favor that your investments today will be worth more in 5 years. For this particular correction of 35% (high to low), there is a 99% chance the market will be higher in 5 years. And to boot, in this scenario, the average return is 78% over this period. If you are a believer in history is bound to repeat itself, this should make you smile!
Where we go from here in the next six months, year, two years… we cannot tell you. The stock market can continue to go up from here, it can correct slightly and then go up, it can test the low set in March, or it can go up and down for the foreseeable future. Unlike many pundits on the squawk box, we are not too interested in calling the bottom. We are interested in making good investments in high-quality companies positioned for solid future growth. And if the March low was not the bottom, we look forward to adding to our favorite stocks when the opportunity presents itself again. We have not seen prices this low, since…. well, the last crisis.
Be well, be safe and we look forward to a bright future!
Note:Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities.