Financial Focus: Surviving the market downturn
By Michael E. Russell
It has been a tumultuous 90 days. Investors are currently on the path to seeing one of the worst years in stock market history. This statement was made by several strategists at Goldman Sachs on CNBC.
This could be considered a reasonable position to take, but why? Well, to point out the obvious, stocks and bonds are off to a horrible start, while consumer prices continue to increase. Also, no baby formula!
If you extrapolate this bad news to the end of the year-even though we are barely halfway through Spring, diversified investors may see the potential for significant losses after inflation.
I take a less dire view. Big stock downturns are normal. Over the last 72 years, the S&P Index has fallen more than 20% from its high on ten different occasions.
There are many differences about this decline. The current decline is approximately 18% from the January high. The major difference is that the current decline has occurred after a market that never seemed to stop going up.
Another interesting point is that during the career of Warren Buffett, the average Bear market has taken about two years to go back to even, while a few have stretched to four years or more.
How about this statistic: the NASDAQ has been positive every year since 2008 UNTIL this year!
My take is that expectations need to change. Crypto currencies have fallen off a cliff. Some investors think it wise to buy in at these lower prices. I disagree. Until Crypto currencies are regulated, losses could be devastating. A case in point is Crypto exchange Coinbase Global which totally missed earnings estimates. The company stated that customers could lose their assets if it were to declare bankruptcy. Coinbase CEO Brian Armstrong tweeted a clarification, saying “we have no risk of bankruptcy.”
Unfortunately, I remember the same statements made by the CEO of ENRON.
A Georgetown law professor recently spoke of crypto bankruptcy risks. His point was that even though the contracts say you own the currency, you have the potential of being a general unsecured creditor if there is a bankruptcy.
For those with strong stomachs, there are plenty of companies with strong cash flow, good growth potentials and decent dividends. Never flee the market. Historically, the stock market outperforms most other asset classes. Domestic stocks represent the businesses that keep America strong.
An interesting point was advanced by Vanguard. They recently calculated that since 1935, U.S. stocks have lost ground to inflation during 31% of one year time periods, but only 11% of ten-year cycles.
I believe investors could begin to add to their portfolios shortly, with the caveat that this market may still have some downside risk. However, keep in mind that the S&P was trading at a P/E of more than 21x in January while currently trading at 17x earnings. Some technical analysts believe that the bottom line may be 15x.
Trying to time the bottom line is futile. Keep in mind that the average annual return for the S&P since 1988 is 10.6%; 34 years of growth.
The view espoused at Morgan Stanley is that there may be a little more downside risk. But Lisa Shalett, Chief Investment Officer, states that segments of the market are priced. For upside surprises, these include financials, energy, healthcare, industrials and consumer service companies.
We still must be concerned about Russia/Ukraine and China/Taiwan.
In my next article I will mention some stocks with good growth potential. Hoping for a market bottom soon!
Until then, enjoy the rest of Spring and stay healthy.
Michael E. Russell retired after 40 years working for various Wall Street firms. All recommendations being made here are not guaranteed and may incur a loss of principal. The opinions and investment recommendations expressed in the column are the author’s own. TBR News Media does not endorse any specific investment advice and urges investors to consult with their financial advisor.