The second quarter is here. Stocks are down yet again.
This time, it’s President Trump – who’s typically been the market’s ally – that’s sending equities lower.
Trump said that the U.S. should prepare for a “very, very painful two weeks” last evening in a sobering press conference. The White House now projects that the coronavirus outbreak will cause anywhere between 100,000 and 240,000 deaths in the U.S.
“This is going to be a rough two-week period,” Trump said.
“When you look at night the kind of death that has been caused by this invisible enemy, it’s incredible.”
American businesses aren’t expected to fare well, either. ADP and Moody’s Analytics found that 27,000 jobs have been cut by U.S. companies through March 12th. That number is likely to get far worse as more data rolls in.
“There’s still tremendous uncertainty. We can look at history as a guidepost for the market and the economy, but there’s not a perfect scenario,” Patrick Kaser, portfolio manager at Brandywine Global, said.
“In situations like this, the best thing for long-term investors is to figure out what they want longer term.”
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And though last night’s headlines disappointed investors, they seem willing to “buy the dip” after this morning’s drop. The major indexes have risen since opening the trading session lower.
If the market can stay afloat from here, the “higher low” that many analysts were looking for just might happen. The S&P 500 is currently up over 12% since last week’s 3-year low. Yesterday, from trough-to-peak, the index had risen over 18%.
A healthy sell-off, especially during such a rapid rally, was expected.
Whether or not it rises from here is the real issue.
Investors willing to take a chance on the market right now wouldn’t be blamed for doing so. After all, those who correctly timed the post-crash recoveries of the past were rewarded handsomely.
However, that’s not to say anyone should jump back in with both feet, all at once.
Instead, using dollar-cost averaging – an old, but historically effective method – might make more sense as the market finds its legs.
It’s a strategy that involves placing a fixed dollar amount into a given investment at regular intervals. For investors looking to take advantage of a market-wide recovery, that could mean investing in the SPDRs S&P 500 Trust Series ETF (NYSE: SPY) once a week over the next month or two.
By doing so, investors can limit their exposure to short-term volatility, which at present is scaring away bulls en masse. Plus, dollar-cost averaging can help investors get a better average price than trying to “buy the bottom” – something that works even better during times of high volatility.
So, as the market continues to wrestle with uncertainty, it might be prudent to use dollar-cost averaging as a way to both take advantage of an upcoming rally and flatten volatility.
Because if a recovery is truly on the horizon, missing out on it would be even worse than avoiding another temporary dip. Long-term, the market has gone up over time.
COVID-19 will eventually be defeated. When investors realize that (or economic conditions improve), a rally of historic proportions will follow.
Don’t let volatility be the reason you step aside.