- April 2, 2020
- Blog , The Portfolio Strategist - Terry Gardner
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Bottom or Not, 25% Down Has Been a Good Point to Buy Stocks – YouTube Video & Transcript
In this video, Terry Gardner notes the stock market’s approval of Congress’ $2.2 trillion Coronavirus relief package, revisits his recession math driven price range for the S&P 500, and looks at how stocks performed in the 12-month periods after 25% declines during the past four market crashes.
Hi, good afternoon everyone. It’s Terry Gardner from C.J. Lawrence on Thursday, March 26th. I hope everyone is healthy and safe. We had another big day in the market today, making it three in a row. So I thought I’d follow up with a video and highlight four points today.
First, we want to talk about the policymakers’ response to the coronavirus and the likely economic decline on the other end of the virus. Two, we want to review our recession math for our target range on the S&P 500. Three, we want to take a look at how the market performed in the last four market crashes, three of which were accompanied by recession, and see how stocks performed 12 months out after declining an initial 25. And fourth, we want to review what we should expect from here.
So first off, with regards to policy, we got what I think the market was hoping for in terms of a fiscal policy response. Congress looks to be passing a $2.2 trillion aid package or financial stimulus package and that will really help the economy on the other side of the valley as we start to recover from the coronavirus shutdown. So both fiscal policy and monetary policymakers have adopted the whatever it takes motto, and that will help the economy get back on track on the other side.
Second, with regard to our recession math range, we talked about a 2,200 bottom and a 2,700 top two our S&P 500 price range, based on some recession math that we had done a couple of weeks ago. And this past week on Monday, we kissed that 2,200 number twice but didn’t break through it. So there seems to be some support there. Interestingly, when we’ve run this analysis over the last two weeks, we did it with the market around 2,500, so we had 10 or 12% downside and 10 or 12% upside. And we’re back there again today, given that the market fought its way back to 2,500, actually north of that at the close. So that range is very much intact, and, of course, volatility could take us easily down below that 2,200 number or even up above that 2,700 number on any given day. But that’s probably a reasonable range to continue to work with.
And then third, we did some analysis that we wanted to share with regards to the last four market crashes to see how stocks performed after markets declined 25%, so using that down 25% as the trigger for a purchase of the S&P 500. So the first period we looked at was 1987, Black Monday. The market declined during that period 31% in just one week. Well, if you’d bought the market when it was down 25%, your return over the next 12 months from that date was 20%, so a pretty good investment if you bought the market down 25%.
The second period we looked at was the early 1990s, where we had a relatively mild recession which came subsequent to the Gulf War. The market during that period sold off peak to trough about 20%, so it doesn’t necessarily fit perfectly with our analysis, but it’s worth noting that if you bought the market 20% down during that period, your return over the next 12 months was up 34%, so a really strong performance by the S&P 500 after being down 20.
And then the third period was the early 2000 period. This was interesting because really it was a double whammy with regard to the bursting of the internet bubble and then shortly thereafter the tragedy of 911, but we can still run the analysis to see how we did from the peak in late 1999, and in fact, if you had bought the market, which was down 28%, if you’d bought it down 25, over the next 12 months you would have had a 2.5 percent return, which is a pretty good return if you incorporate the fact that 911 happened within that period. So the market struggled through the tragedy of 911, a downturn in the economy, peak, fear and uncertainty. And yet the market still recovered, given that 12 month period, a 2.5% return.
And then finally we dissected the financial crisis of 2008/2009 last week into its component pieces. As you know, I kind of start the clock in terms of crisis at the collapse of Lehman Brothers in September of ’08. If you had bought the market when it was 25% down after Lehman, and you bought at that point you’d have a 12 month return of 18%. So net/net, in all four of those periods we looked at, if you had bought the market down 25%, you had a handsome return over the next 12 months.
That’s pretty instructive, I think, given that we’re down about 25% now. If history repeats itself now, even though we may go lower, is kind of an interesting entry point. So forth, where do we go from here?
Remember last week we expressed the need to move through several phases. First being kind of peak, fear and panic, and it feels like we are starting to move through that peak. It seems that visibility has improved in terms of where the virus is going and when it may be peaking. The medical experts here in New York seem to suggest that we’re going to see a lot more cases in the next two weeks, but that we’ll likely see a peak in two to three weeks. That’s worrisome for our citizens, for the markets. The markets thrive on some type of visibility, and that may have contributed to the rally that we’ve seen. The market can start to calibrate where these peaks in virus outbreaks will be realized. The rest of the country may be behind New York. So we’ve got a ways to go, so this may take still weeks and months, but we’re starting to see some signs of where peak virus can be measured.
Thirdly, we were going to look to see when stocks stop going down or don’t go down on bad news. So we’re going shortly here go into first quarter earnings seasons, where corporate America is going to start reporting their first quarter results, and when they do that, they’re going to give us some guidance or pull guidance for what the rest of the year looks like. And we would expect that outlook to be very negative. And so that will be released into the market. Analysts will ratchet down their forecast for the remainder of the year. Economists will cut GDP forecast.
We’re going to watch to see how the market digests all that bad news. If stocks don’t go down on that bad news, it’s a good chance we’re really in the midst of this bottoming process. If you are a long suffering New York Jets fan like I am, you’ll remember when Eric Mangini came to coach the Jets from the new England Patriots, and week after week after week told us that, hey, building a team, building it back up. It’s a process. It’s a process. It’s a process.
It got a little old, but you’re going to hear that, I think, for the next couple weeks and months. This bottom for the market is going to be a process. We’re going to have some big down days. They’re going to make you think, hey, this thing is going to go another leg lower. We could have some big updates like we saw today. It’s going to be a process. We’re going to have to work through it. But we’ve done our math to kind of keep our ranges intact.
And then finally, we’re still looking across the valley. Here at C.J. Lawrence, we’re very focused on the names that we have the highest conviction. We do believe there are going to be select companies and their stocks that come through this stronger than ever. And that’s where we want to be positioned. That’s where we are investing our clients’ money, in those companies that will be on the other side of the valley stronger than ever.
So if you’ve got any questions for us, please give me a ring, 212-888-6403, or shoot me an email at firstname.lastname@example.org. Stay safe and healthy, and look forward to catching up with you next week. Thank you.