Should you be buying stocks now?
Take advantage of opportunity in prudent way
I am hearing from readers who whether it’s time to start reinvesting in the stock market.
Unfortunately, I can’t predict the tops and bottoms of markets. I do believe, however, the prospects for the stock market a year from now are good. But a conservative approach is called for.
I hope my readers have followed my advice not to have all of their investments in the stock market. I have argued repeatedly that even retirees should have significant investment in stocks, but I also declare that investing a significant portion of your portfolio in bonds is prudent. That approach can soften your losses in a bear market, which is where we are now.
But how long will it last?
In a recent interview in Barron’s, Ed Yardeni, the well-respected market analyst, shared some observations that make a great deal of sense to me.
Yardeni, who until the coronavirus pandemic had been quite bullish, believes the bear market will likely last at least until the middle of 2020 and anticipates that the pandemic will have a significant impact on the global economy. He believes that there will be a significant drop in consumer confidence; as a result of extreme measures that governments throughout the world have been taking, people are going to fear the worst, focus on bad news and ignore areas of progress.
The problem is that that fear is spreading much faster than the actual virus.
He said he thinks that we will see a global recession, which will include Japan and Germany, and predicts a severe recession in Italy. Based on the experiences in China and South Korea, he believes the virus will dissipate significantly by the middle of the year and the bear market in stocks should end around then.
He estimates that S&P profits for the for the first half of the year will be flat, yet he believes the U.S. economy will show a 2% real gain in gross domestic product in 2020. He doesn’t believe that the Saudis and Russians will continue to keep oil prices low for very long because they can’t afford to.
A 30% drop from the top of the S&P 500 brings the level to 2,300-2,400. He had anticipated, before the pandemic, that the S&P 500 would reach 3,500 by year-end. Now he believes that won’t happen until 2021.
So, back to the question readers have been asking me: Should they be buying stocks now?
Yardeni believes, if you have cash, this is time to buy quality names, such as some of the dividend-yielding stocks. In the past, I have recommended that readers consider Vanguard’s Dividend Appreciation Index Fund (VDADX). The fund currently has a yield of approximately 1.9%, an expense ratio of 0.08% and a five-year annualized return of approximately 9%. You can re-invest the quarterly dividends back into the fund or request that you receive the dividends.
Some of my readers have indicated they have significant holdings in money market funds and other short-term investments such as Treasury bills, and that they are ready to reinvest in the stock market. Others want to increase the proportion of common stocks in their portfolios.
Others continue to dollar-cost average into stocks, which I do and recommend. Specifically, dollar-cost average to reinvest in diversified index funds or ETFs over an extended period, even as long as a year. It is hard to predict how quickly the stock market will recover, and this conservative approach allows you to take advantage of opportunity prudently.