That could prove to be a very long five years, which would provide long stretches of sideways trading, with the possibility for big spikes both up and down, especially if the coronavirus becomes a seasonal flu type event. They also point out that after years of underperformance, value stocks actually could start to outperform growth stocks in the 2020s. They said this in the report when discussing that possibility:
The U.S. 10 year yield premium to foreign yields, which implicitly reflects growth differentials, has evaporated, so after the current foreign debtor short squeeze (dash for dollars among foreign dollar-denominated debtors) that is lifting the dollar (USD) subsides, we see the USD falling sharply in 2021+, which typically helps Value stocks; Growth stocks have soared with a strong USD and low yields (ergo rising P/E) 2010-20, but Growth could lag Value in the 2020s amid a populist-fueled rotation (while weakening the 2020s full decade overall S&P 500 total return, primarily by P/E compression).
The potential rotation to value would be interesting after being out of favor for so many years. Investors who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value), rather than dividends. Value stocks are those that tend to trade at a lower price relative to their fundamentals including dividends, earnings and sales.
One of the greatest value managers of our time, Bill Miller, said this past week that the current buying opportunity is one of the five best that he has seen in his long and storied career. He did toss in the caveat that we may not have found the bottom, and he isn’t the only one.
Goldman Sachs declared at the end of the week that it was cutting the firm’s 2020 earnings estimates for the S&P 500 to a stunning $110. That is an incredible 35% decline from what was posted last year. They also think it is possible for the market to take a final leg down to the 2,000 level. That would match the levels printed in 2014. They also think that the S&P 500 will finish 2020 near 3,000. In fact, after hitting 2,000 in 2014, the market essentially traded sideways for two years before breaking out higher. That is the kind of trading action we could see in the early to mid-2020s, if the Stifel scenarios play out.
There are some important items to remember. The velocity of the selling over the past month has been incredible. The damage that was inflicted on investors in a month often takes six months to a year or longer. In addition, we are dealing with a pandemic that has shut down the economy and pushed us all inside for the first time since 9/11.
On a promising note, unlike 2008, our banking system is in very solid shape, and the economy before the shutdown was rolling with unemployment at the lowest levels in 50 years. Should the coronavirus pandemic be brought under control, and the infection rates level off or start to decline, we could ramp back up to growth by the third quarter.
Investors should think about buying small positions now and keeping some dry powder just in case we do sell off to the 2,000 level. Like Miller said, this could provide one of the best buying opportunities in the past 50 years, and betting against the United States and our economy has never been a good long-term trade.
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