From Correction to Crash: What to Do Now If We Are Heading to Rock Bottom

The “buy the dip” financial news teleprompter readers and the 30-year-old portfolio managers that have never seen a market crash are suddenly very silent and can’t be found. Market veterans and “hey boomer” professionals have seen this show before. Back in 1987, the Dow Jones industrial average plunged a stunning 22% in one day. The equivalent today would be a drop on the venerable index of almost 5,800 points.

From 1929 to 1932, the stock market plummeted a stunning 83% and many people lost everything. That debacle caused the Great Depression, which really only ended when we entered World War II in 1941.

From 2007 to 2009, during the height of the mortgage and real estate collapse, which brought us dangerously close to another depression, the market dropped a huge 57%. When stocks finally bottomed at an ominous intraday low of 666 on the S&P 500 on March 9, 2009, we put in the floor for the longest bull market in history. That bull market may be coming to an end.

So where do we stand now? Very possibly on the precipice of a much larger decline. The wild 1,000-point swings are not good at all. Massive margin calls exacerbate the moves to the downside, while algorithm computers scan every bit of data looking for news that could send shares up huge and then back down huge.

Needless to say, the coronavirus is the leading culprit for the heightened nervousness. Then add in the fact that the overall market was trading at historic multiple highs, as momentum traders kept pushing some stocks to ridiculous levels. The massive jump in Tesla earlier this year, which was magnified by huge short covering, is a good example. The stock surged well over 100% in just over a month.

It’s a pretty good bet that the Federal Reserve, which did an emergency cut of the federal funds rate of 50 basis points, or one-half of 1%, is poised to lower rates even more. Merrill Lynch thinks it’s very possible we see a 25-basis-point cut at the March meeting and another at the April meeting. If things really go downhill fast, we could see another 50-basis-point cut at the March meeting.

When the Federal Reserve cut interest rates on Tuesday to combat the economic slowdown resulting from the coronavirus outbreak, it was not a total surprise to market veterans. However, it was the first emergency rate cut handed down from the Fed since the height of the financial crisis in 2008, as well as the first of this size since then.

Worried investors are starting to think back to the 2007 to 2009 crisis, which was a time when looking at brokerage statements became a grim monthly reality. While the reversal of fortune for former Vice President Joe Biden in his quest to win the Democratic nomination briefly provided a respite from the selling, we are right back to big-time moves to the downside.

Technically, with the exception of the Nasdaq composite index, which for years has powered the strength in the market, the Dow and the S&P 500 have dived through their respective 200-day moving averages. That does not bode well for the overall market. In addition, the Transport Index, which is often an indicator of strong economic strength, has been absolutely obliterated, another worrisome sign.

There are some important items for investors to consider now, as they may have to prepare for the worst:

  1. Do not continue trying to catch the proverbial falling knife. Instead, it may make sense to match current losses against gains, even if they are short term in nature, to help build up a cash supply. The proverbial dry powder may come in handy down the road.
  2. Immediately, if at all possible, close out any positions on margin. For individual investors to use margin loans to buy more stock is a bad plan when times are good, especially when those margined positions are high-volatility momentum stocks.
  3. As we have recommended for years at 24/7 Wall St., a position in gold helps to mitigate the downside, and as we noted recently, gold soon could be going to all-time highs.
  4. Make sure that all the dividend-paying stocks and mutual funds in personal and retirement accounts are coded to reinvest all capital gains and dividends. This allows you to buy more shares when prices are hit hard. The first quarter is ending, and many stocks and funds pay dividends on a calendar quarterly basis.
  5. If you have the good fortune to come into a windfall, like an inheritance or something similar, think about real estate. With mortgage rates dropping to historical lows, owning cash-generating rental property is an idea that makes sense now.
  6. If you do indeed need to look for stock ideas, look at extremely conservative ones, those are not affected as bad by even the worst-case scenarios. In other words, companies that provide goods and services that are needed all the time.

The almost 11-year bull market has been a blessing, and now it may end up being a curse. There were numerous drops and corrections along the way. The fourth quarter of 2018 is a good example, when over a three-month period the S&P 500 declined 18% on an intraday trading basis. After all the pain over the past two weeks, which saw the fastest 10% or so decline in market history, we are still not close to being down as much as in 2018.

Remember that even the most difficult events in human history and investing eventually have been overcome. Whether it be health care related, war related, foreign geopolitical or domestic troubles, or any of the other plethora of issues that have combined to cause market sell-offs.

A vaccine for the coronavirus most likely will be found in time. Seasonal flu kills far more people each year than have died from the current coronavirus strain. Many of the deaths are from people that were already in poor health and with pre-existing conditions. While it remains unnerving, the shrill calls from the media always seem to make things appear worse than perhaps they really are.

Lastly, many people will argue, and rightfully so, that the current coronavirus situation is just another in a long litany of the “world is doomed” health scares, and with good reason. They said the same thing about the West Nile virus in 2002, SARS in 2004, bird flu in 2005, swine flu in 2009, Ebola in 2014 and Zika in 2016. None of those turned out to be legitimate pandemics. So try to keep history in perspective, and play it safe until things bottom and finally turn higher.

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