How investors can respond after collapse
Global financial markets spiraled into bear market territory in record time because of the virulent, cross-border spread of the coronavirus that causes the COVID-19 infection. As the number of U.S. cases surged in mid-March and President Trump declared a national state of emergency, the specter of a global recession quickly morphed from economists' worst-case scenario to the expected outcome.
For U.S. stock investors, the bear attack seemed to come out of nowhere after record highs. The new bear market is the 13th since World War II, and the quickest to close below the 20%-loss threshold that marks an official bear. The average decline for post-war bears is 33.5%.
But some experts are struggling to find meaningful signposts in Wall Street history this time around.
Where the market bottoms depends on the course of the pandemic. But it's important to remember that bear market bottoms are more of a process than a level on an index, and volatility may linger as the damage to companies' bottom lines and to the economy overall comes into sharper focus.
What should investors do? Sharp, swift stock-market drops are often followed by dramatic rebounds.
Goldman's chief strategist David Kostin sees a mid-year low of 2000 on the S&P 500, a 41% drop from the high. But he forecasts a sharp rebound — a bit higher than the median six-month return following previous event-driven bear markets — that could lift the S&P 500 to 3200 by year-end, a nearly 27% jump from its close on March 17.
Not all strategists are as optimistic, but most are urging investors to take advantage of a rocky market to gradually add to holdings at bargain prices.
“Investors should, in a disciplined, patient way, in line with their risk tolerance, add to certain sectors,” says Sameer Samana, a global market strategist at Wells Fargo Investment Institute.
Wells Fargo favors U.S. over international stocks, midsize and largecompany shares over small-caps and sectors including technology, communication services, consumer discretionary and — a dark horse pick as interest rates plummet and recession looms — financials.
As you assemble a stock market buy list, tilt toward high-quality and dividend-paying investments. Look for companies with consistent earnings growth, wide competitive advantage and strong balance sheets, with little debt and plenty of cash.
According to strategists at BofA Securities, high-quality stocks with defensible dividends include software giant Microsoft (MSFT), health care firm Baxter International (BAX) and Fifth-Third Bancorp (FITB). Companies that Goldman Sachs singles out for their stable earnings growth and strong balance sheets include Alphabet (GOOGL) and Costco Wholesale (COST), both of which stand to benefit in the face of the coronavirus.
Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.