Finances,  Investing

The 2020 Stock Market Crash – Coronavirus, Earnings and Losses

The 2020 Stock Market Crash

The 2020 stock market crash is here! I’m being a bit over-dramatic as we’re just in correction territory but still! As always, the stock market takes the stairs on the way up but an elevator(or cliff) on the way down.

What’s happening right now reminds me of what happened around Christmas last year.

The S&P 500 hit 2900 on August 31st, 2018. That was about a year after it hit 2500. By December 21st of that same year, we were back down to 2400. That’s a quick drop of almost 20%! The headlines were pretty bleak and portfolios tanked.

The Chinese economy was slowing, things were bad etc. and we were in near bear market territory(20% down from highs). People sold a lot while others(myself included) took advantage and bought.

After that, people quickly forgot about it and the market trudged upwards again. It ended up being a great time to buy! I guess things weren’t really that bad! 2019 brought with it ridiculous 30% returns and stock market mania was back in full swing. The S&P 500 roared past 3300 in January 2020 even a some new problems arose.

In a certain way, it really solidified the idea of buying the dip in a lot of people’s minds. The recent crashes have been quick and taking advantage of them has worked out well and that continued into 2020.

Now, it was the coronavirus outbreak that was in the news. For a while, no one seemed to care. However, it got me concerned for the first time in a while.

I don’t know about you but it all felt a bit manic. There’s this pretty widespread thing that will likely impact future earnings but nobody seemed to care. It was as if the stock market train couldn’t be stopped.

For the first time in a while, I started to sell a bit.

And yes, I know this blog is called time in the market. Time in the market beats timing the market, I totally believe that.

However, I do have an investment plan that calls for up to 15% cash in my portfolio when I feel uncomfortable investing. In early 2020, I started to feel uncomfortable.

I like having a plan that has flexibility as an investor. It still keeps me investing with the majority of my money. After all, an investor is more likely to be wrong than right. However, it gives me peace of mind when things like this happen.

To me, it all just seemed bigger at the time. I guess the market didn’t think much of it, it would probably get contained after all. That seemed to be the case for a while.

I wasn’t too worried if I’d be wrong. After all, we’re looking for a house now so a bigger down payment would be good. Plus, it’s always good to have dry powder on the side as values can arise at anytime and a bigger emergency fund can’t hurt. In the end, I was still mostly invested as is the goal of my investment plan so the benefit from further market growth would be there.

Still, the reprieve from the virus didn’t last long.

Apple was the first big wig company to revise their earnings. Microsoft came next and then people started to realize that this might actually have an impact. How about that, closing the world’s 2nd largest economy is bad?

The great 2020 stock market crash began! OK, maybe I’m overselling it here. We’re about 5 days into a rather precipitous fall. It’s that elevator again! However, the S&P 500 is still only back to 2900, a number it hit in October of last year.

We’re in correction territory but still a few bad days away from a bear market. It’s been a fast correction and certainly scary and one that has definitely impacted certain industries more than others.

The travel industry certainly isn’t doing well. Hell, who the hell is going to want to take a Cruise after what happened in Japan? Some of those stocks are down 40% in a matter of weeks. We just booked plane tickets to Spain recently and are thinking about cancelling now. I doubt that’s a unique thought process right now and that certainly won’t be good for certain industries or economies.

However, right now a lot of stocks are still just back to highs they reached just a few months ago. Calling it the great 2020 stock market crash is so premature.

I’ve seen a lot of talk of buying the ****ing dip because it has worked so well in the past. One thing to remember is that the S&P 500 was at 2900 just a few short months ago with better earnings projections and no coronavirus. Why is now such a great deal?

The question right now is whether this’ll be like December 2018 or if it’ll be different. The stock market fell almost 20% and then recovered quickly to one of the best years in recent history.

We’re seeing the start of the exact same thing in February 2020. Will this be a short term blip like all the others since 2008 or will this turn into something more?

I don’t know the answer to that question yet. However, I do feel a bit of trepidation around how much impact this may have and it’s the first time I’ve had that in a long time.

The stock market since 2008 has been a pretty easy ride. I mean, just look at the graph below.

2020 stock market crash

There’s certainly some drops but most of them were short lived. I never felt worried as an investor. However, all good things must eventually come to an end and we’re 11 years without a recession.

Recently, my company had layoffs and I’ve read and heard about many others. For the first time, I feel like we’re in recession land and that’s never good for short term returns.

The Coronavirus has already forced Goldman Sachs to basically say that earnings won’t grow at all this year. Their $165 earnings estimate means a forward P/E of 18 at today’s prices. Is that expensive? Maybe, maybe not. However, low earnings growth certainly won’t make companies happy and more layoffs could be around the corner.

Layoffs, less spending, more worries about travel due to corona and the economy could certainly suffer.

The Schiller P/E ratio is still in the high 20s despite the 10% drop and we’re only just getting started with the potential impact of the virus in the U.S. Could it get worse? I don’t know, I can’t tell the future! But in the end, for me, it doesn’t matter much, I’m a long term investor, I have an emergency fund and a cash cushion due to my investment plan. I can wait it out.

Do stocks seem like they could fall a lot more? Yes, they certainly do but anyone who tells you that for sure is lying to you.

However, the other side of the coin still exists. Stocks may still seem pricey but they’re still the best deal on the block for when earnings start to grow again. 10 year yields are barely above 1.1% so you’re and even at a P/E of 25(if earnings drop more), stocks yield 4%. That’s not a bad deal in relation to bonds even if earnings somehow don’t grow for the next ten years.

What would you rather have. A 1.2% yield that has no potential for growth or a 4% yield with potential for growth?

These days, people often talk of P/Es in relation to historical values but they have to account for historical alternative investment yields too. Stocks have been and will continue to be the best value around until that changes.

There’s still plenty of unknowns but I do firmly believe that stocks will still do well in the long term. Even those unlucky investors who bought at recent peaks will do well, I believe that.

Is this the beginning of the great 2020 stock market crash?

Should I be buying the dip with all my funds right now? Remember, we’re just back to the highs of later 2019 so it’s not like these are suddenly great “deals”. You could have had most of these stocks at these prices without the specter of Corona just a few months ago.

Still, the real answer is, I don’t know for sure. The virus could turn out to be a short lived phenomenon or it could linger for a while. I do think we have a way to go before we bottom. However, I’m at my max cash allocation and the recent drops means I’ll be buying more and more if we keep dropping. After all, that’s the point of an investment plan and asset allocations.

I have a 15% cash max so a stock market drop will put me above that max and I’ll be forced to buy. I also have bonds which are now over-allocated so I’ll be buying stocks aplenty.

What am I buying? Likely, defensive plays like my dividend aristocrats portfolio.

After all, the key thing to remember is that we are investing not trading. Investing is a long term game where short price fluctuations don’t matter. The 2008 recession saw the market drop by 50% and was a terrible time for many. It was also one of the best times to buy for a long term investor if they had the capital. I’ll certainly be employing my capital wisely if we keep moving below today’s prices and getting higher yields than I did a few weeks ago.

This may turn out to be a short term drop like we saw in December 2018. However, It may also turn into a recession and a lot of pain ahead. However, as long as you have a long term investing mindset, have an emergency fund in case things go sour on the job front and a solid investment plan along with a reasonable asset allocation, the future shouldn’t worry you.

If it does then you need to revisit your investment plan. If you need the money in the short term then maybe investing in a volatile stock market is not the best place for you. Volatility will be the name of the game here. Anytime something like a potential worldwide pandemic hits, the expectations for what can happen go out the window.

I’m glad that this last week didn’t phase me one bit. It basically tells me that my investment plan works for me. I’m more worried about the health of my friends, colleagues and family and the safety of those around the world. It’s never easy seeing big red numbers in the portfolio totals. The pain of loss is felt much more than the excitement of gains, that’s just human nature.

However, paper losses don’t matter if you’re invested wisely and according to a sound investment plan. However, they can certainly be nerve wracking if you haven’t experienced them and many young investors haven’t so it’s important to keep a calm head and invest wisely for the long term. It can be hard to do that given the market we’ve had as the gains have been so instant and any losses so short lived. Maybe it’ll be the same this time but maybe it won’t.

Best of luck to all and happy long term investing.

As always, time to head to the Winchester, have a nice cold pint and wait for all this to blow over.

One Comment

  • Bob Haegele

    Interesting. I’m still not changing anything despite this drop. It’s mostly driven by this virus, which is a flu-like virus. It will likely be over in a month or two and then things will start to recover. It could be longer, but it won’t last forever. Just my two cents.

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