With stocks sinking, buying opportunities are emerging for long-term investors.
In February, the S&P/TSX Composite Index climbed to a record high. Fast forward one month and the index is down more than 30 per cent, a figure that can change significantly by the hour.
The downdraft has been swift and indiscriminate, with every sector in the index experiencing double-digit losses over the past month, led by energy.
Sellers have dominated the market, including investors taking profits or covering margin calls, automated trading algorithms and short sellers. Given the uncertainties caused by COVID-19, buyers have remained on the sidelines, and rightly so.
Sentiment remains extremely negative, with the severity and length of the economic impact stemming from the coronavirus pandemic still unknown. Information is changing rapidly, which is causing markets to remain volatile, leading to extreme intraday market moves that have caused market circuit breakers to be triggered.
During my days as an equities portfolio manager, I learned not to catch a falling knife. It’s better to wait for the markets to stabilize and risk missing the initial snapback, rather than accumulating positions too soon for two main reasons.
First, markets tend to overshoot. Cheap stocks can get cheaper.
Keep in mind, this is the first pandemic in the social-media era. Information is readily available, but fear can also spread easily.
Second, ripple effects may rock the markets. News of bankruptcies, a credit crunch and rising unemployment may place further pressure on stocks. There could also be a re-escalation of coronavirus cases once restrictions and lockdowns are removed.
Consider FedEx Corp.: As a leading international shipper of goods, the company is a good barometer of global trade and economic conditions. On March 17, the company reported its financial results for its quarter ended Feb. 29.
On its earnings call, FedEx president Raj Subramaniam discussed the resumption in activity in China. “FedEx flew 246 flights in and out of China just last week, which is aligned with our normal flight schedule and over the past couple of weeks, our flights have been full, and we have registered record load factors intra-Asia, especially with our hub in Guangzhou,” he said.
Could the resumption of business activity while the coronavirus continues to spread worldwide set us up for a second wave of cases? We simply don’t know.
When the S&P/TSX Composite Index declined 10 per cent, then 15 per cent, and later beyond 25 per cent, I still remained hesitant to suggest buying opportunities were emerging in the stock market.
However, I am more optimistic now as governments, central banks, businesses, and individuals are taking aggressive actions worldwide. Meanwhile, medical researchers are working tirelessly to develop a treatment and future vaccine against this novel coronavirus.
Stock markets are anticipatory, and when the growth rate of new COVID-19 cases starts to fall, indexes may finally be able to stabilize. But as long as the number of cases continues to rise at an increasing rate, markets will continue to be volatile.
Even so, for investors with longer-term horizons, buying opportunities are emerging. For millennials, this market mayhem is providing opportunities to plant seeds in selective stocks for future financial success.
So, when should investors pull the trigger and buy stocks?
A good practice is to wait until there is a string of multiple up days in the market, potentially signally that aggressive selling activity is exhausted. Since the S&P/TSX Composite Index peaked on February 20, we have not experienced two consecutive days of market gains.
When purchasing stocks, invest with a staggered approach, and not all at once, because it’s impossible to time a market bottom.