Investors may be wondering if now is a good time to buy stocks. The bloodbath in the UK stock markets knocked 35% off the value of the FTSE 100 index. The FTSE 250 index fared worse with a 41% slump.
Many investors may believe the only good time to buy stocks is when the market has bottomed. The trouble is that market bottoms are difficult to predict. I will use the S&P 500 index and the US economy to demonstrate – just because the information is easier to find – but the lessons learnt are applicable in the UK.
It is difficult to time a market bottom
The S&P 500 index bottomed on March 2, 2009, at 638, a day after the FTSE 100 made its final low. What happened next was the longest bull market in history. On February 10, 2020, the S&P 500 hit an all-time high of 3,380, or 530% above where it started.
Now, of course, some people may have called the market bottom back in March 2009. But to think it was obvious would be a mistake. Advanced estimates of GDP for the first quarter of 2009, released in April of that year, showed a contraction of 6.1%. In that same month, the US government brought in measures to help homeowners struggling with mortgage payments.
In October 2009, unemployment rose to 10% in the US, the highest it had been since 1982. US GDP did not return to growth until the third quarter of 2009, and investors found this out in late October. Some investors may well have called the market bottom. However, market bottoms are only confirmed long after they happen. Ask yourself, given the news coming out before and after March 2, 2009, would you have thought it was a good time to be buying stocks?
Should you buy stocks now?
We are in a similar situation now. The cause of the crash, the coronavirus outbreak, is not over. Yet the FTSE 100 jumped by 16% over three days, from a low on March 23. It has fallen back a little, but no new low has been made. Is this the start of a bull market?
According to data from Salisbury House Wealth, the average bear market depth since 1925 has been 36.5%, peak-to-trough. This suggests that the worst of the stock market decline may be over. But then again we don’t know how long the UK economy will be on lockdown at the moment, nor are the ultimate effects on the economy certain at present. So we are frustrated again in answering the question of whether or not now is a good time to buy stocks.
What is certain is that bull markets usually last far longer than bear markets. According to Salisbury House Wealth, the average bull market runs 507% from trough to peak, so they deliver much more in gains than bear markets take away.
I have argued that regularly investing is the best thing to do to deal with bear markets. In the long run, it is far more critical to participate in bull markets than to avoid bear ones. An investor trying to time the market bottom will probably miss a good chunk of the bull market.
So my answer to the question of whether now is a good time to be buying stocks is yes. But then, for a regular investor, it is always a good time to buy quality stocks.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020