Hello, all. Eric here. I hope that everyone is keeping safe. Today we have a guest post from Chris Pascale.
How Bad Is the Stock Market? It’s “As Good As It Can Get”
By: Christopher Pascale
When President Trump took office, the Dow Jones Industrial Average had nearly reached 20,000 points and the common sentiment was that it was time to time the market. In fact, some readers in this Retire by Forty article commented in early 2017 that they would cash out.
Having the superpower of hindsight, we know that the peace of mind that came with selling had cost potential later gains, but so long as they didn’t buy in later they are actually about where they were, meaning that the US Market is about where it was on Inauguration Day when President Trump took office, which many said was as good as it could get.
That’s how bad things are: They are so bad that they are about where they were when we thought they couldn’t get any better.
The Stock Market Today Compared to 3 Years Ago
Using this Dow Jones chart, you can see that on March 30, 2020 the average was over 22,000. When President Trump took office, it had not yet hit 20,000, otherwise thought to be a completely magical number that could perhaps note the beginning of the end of the bull market.
When the average went over 20,000 in 2017, many thought there had to be a correction coming, or even a major crash. Instead, it eclipsed 29,000 before COVID-19 took us all by surprise, “destroying the marriages of the rich”, starving the poor in India, and causing New York Suburbanites to wear facemasks even though the virus is not airborne.
Where Does This Leave Real Investors?
A person I’m close with received $150,000 in 2009 and put it into 3 Fortune 500 stocks. Prior to this crash the account grew to $400,000. Today, the account is worth $280,000.
That means the average annual growth on this account is about 6%. So, in a down time, this account has grown at a much better rate than CDs or bonds could have ever gotten.
For some more perspective – going back to the Dow Jones Chart – had this $150,000 been invested into an S&P 500 Fund when the market was at a previous height in October, 2007, right before the crash that brought us into the Great Recession, the $150,000 would be more than $210,000, bringing an annual return of about 3.2%; still better than what “safe” investments at the bank bring.
Two Conclusions In The Moment
Conclusion No. 1: First, consider those numbers above. Even if you invested into the S&P 500 at the height of the market in 2007, your returns today would average you over 3% if you never reinvested the dividends.
Conclusion No. 2: As Eric sometimes says, it might be time we start going shopping. Some companies are going to go out of business, but others are on sale.
I’m re-reviewing my purchase of Rocky Mountain Chocolate Factory (RMCF). It’s down about 50% since I bought it, but the financials show that cash on hand has remained level over the past 3 years, and they seem to have gotten LEAN with their inventory. However, total revenue and net income have gone down over the past 3 years.
I also find Ford to be interesting. Many news articles claimed that the virus was taking Ford down with it, but when I compared its daily drops to other companies, it looked like there were no material differences. This happened during the auto bailout in 2009, too. Ford didn’t need a bailout, but their stock dropped like a rock simply because they were in the auto business.
I’m not recommending you buy Ford or RMCF. In fact, the only thing I’m really recommending you buy is a little bit of perspective. Because while many feel that things are really bad right now, all I can see by way of the stock market is that it’s a little bit better than when we thought it couldn’t get any better.
Final Conclusion: How Bad Can It Get?
It should be noted that it can get much worse in the short-term. Some projections state that 20,000,000 jobs may be lost by August. If so, those with money in the market are likely to cash out to pay basic expenses – for themselves, or for loved ones with no assets to sell. The result will be share prices dropping as many sellers seek to get as much as they can from few buyers.
I won’t make any guesses about what number the Dow Jones will hit, because it could simply plateau at its current level, which, as already noted, is very good.
Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose, and is a current member of the IRS’ Office of Appeals.
Click the image of the book at left to be taken to its Amazon page. (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)