This Is A Rare Opportunity

This Is A Rare Opportunity

Michael A. Gayed, CFA
  • Michael A. Gayed, CFA
  • CFA, macro, newsletter provider
  • MARKETPLACE  The Lead-Lag Report
Summary

A look at recent volatility in the markets – it will come down eventually.

With global markets consolidating to the downside, now is the time to start pouncing on deals.

What happens to markets after a 30%-plus decline? Let’s look at history.

  • “The stock market is like a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’” – Ben Graham

What a month, quarter, year we’re having. It’s ugly out there, and don’t let anyone tell you otherwise. I wanted to provide some more context as to why I mentioned on the Lead-Lag Report that I think we are nearing a bottom. One thing I pay attention to is the VIX. And how volatile markets are. We may have seen the peak on March 16, when the VIX reached an astronomical 82.69. That’s the worst level since the Financial Crisis.

  • However, for me, this is an excellent indicator that things are trying to bottom out. If volatility can’t get much worse, we could be seeing our way out of this transitory issue. Yes, there will be vast economic impacts, and things look very bleak right now.
  • Keep it positive, and remember that the world is NOT ending tomorrow. This may be one of the most exceptional opportunities to invest in this decade with hindsight. What do you think the legendary Warren Buffett is doing right now? Adding to his cash pile, or spending it? My money is on the latter.

Source: Bespoke Investment Group

  • If you’re looking around the world for deals, it won’t be hard. A look at global markets that have been crushed is below, also from Bespoke. The standout is energy and oil, which, if you’re brave, is a good place to add a little to your portfolio.
  • Things are the worst there, but I do not think the world is instantly going away from fossil fuels anytime soon. There are some compelling cases to be made for investing in China and India at these levels (China has held up pretty well, considering, as they tackle the coronavirus).

Be wary of going too far down the market cap levels, as the smaller you go, the more likely there’s higher leverage as well as an inability to service that leverage. Be picky. You can afford to at times like these. Buy things that will survive this. If you think Amazon (AMZN) is going broke, for example, you haven’t been paying attention. Apple (AAPL) has around a quarter-trillion in cash, which should be pretty useful in times like these.

  • And if you’re looking for a diversified value play, you can always buy Berkshire Hathaway (NYSE:BRK.A) (BRK.B) and put your faith in “Uncle Warren.” Or, if you want complete diversification, a look at the Vanguard Total World Stock market ETF (VTI) says all you need to know and might be an opportunity.

Source: Bespoke Investment Group

Looking forward, there’s light at the end of the tunnel, but darkness is possible first. When we look at 30%-plus declines in the stock market history to 1929, the results are mixed a year out, so be prepared not to have optimal results investing here. And it can fall further if you look at the max declines from this point forward.

  • One thing that’s clear, though, is that time is the cure (pun not intended…) for everything. These are horrific times, as were the prior periods. And although it may take some time for this to get figured out economically, it’s clear to me that eventually, stock markets will recover. It may be a year or two or more, but if you stay consistent with your strategy and get your cash to work here, you will eventually be rewarded.

Don’t miss out because the headlines in the news say the world is ending, because it isn’t. There will likely be more social distancing, more pain, more isolation over the next few months. The world has had worse things to deal with and come out stronger – this time will be no different. Markets will become overvalued at some point in the future again, which is precisely when you should be defensive – when things seem like they are going to go forever.

  • In times like these, though, it’s worth considering what being an investor is all about – buy low. For tactical traders and investors like me, our service has specific risk-on/off signals to help with that. And after having gone risk off Jan. 27, we are getting close to a change.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.