We just had the quickest onset of a bear market in history. It took just 21 days for stock prices to drop from all-time highs to losses of more than 20%.
Of course, it didn’t stop there. We’ve plowed through the 30% loss mark, and there very well may be more pain to come. Only time will tell.
But all of that said, this is precisely the time you should start making your buy list. The market overall isn’t wildly cheap. I know that’s hard to imagine after the plunge we’ve seen, but consider the Cyclically Adjusted Price/Earnings ratio (“CAPE”), also called the Shiller P/E after Yale professor Robert Shiller.
The CAPE compares current stock prices to a ten-year average of earnings. The idea is to smooth out the effects of the economic cycle. In any ten-year period, you’re likely to have seen a boom, and bust and everything in between.
Prior to the coronavirus meltdown, the CAPE was trading at nosebleed valuations in line with the levels just before the 1929 crash. The only time in history that valuations were higher was during the late 1990s tech mania.
The recent drop has certainly taken the froth out of the market. But it’s not cheap yet, or at least not by historical levels. Today, the CAPE is sitting at 23.1. That’s lower than the 30.9 we saw just last month. But it’s a long way from the historical average of about 17 and a long way from the 2009 bottom around 13.
Research site GuruFocus ran the numbers and found that valuations at today’s levels imply annual returns of about 2% over the next eight years.
That might end up being a little on the conservative side. They base that estimate on data going back to the late 1800s, and the economy has obviously changed a lot sense then. We live in an era of zero-percent interest rates and quantitative easing, so estimates like these should be taken with a grain of salt.
That said, I’d stand by the point that the market isn’t “cheap” at these prices, or at least not anywhere near the cheap levels we saw in 2009.
Remember though, the stock market is a market of stocks. While the averages might not be down all that much, remember that the major indexes – the Dow, the S&P 500, etc. – are dominated by a handful of tech companies that are less affected by coronavirus disruptions. Elsewhere in the market, there are some bargains I never imagined I’d see again in my life.
Out of fairness to my paid readers, I won’t mention individual stocks. But one of my favorite pipeline stocks is down 55% since the beginning of March and now yields over 20%. One of my favorite REITs, which owns primarily senior living centers, is down over 60% since the beginning of March and now yields just shy of 20%. Another REIT I love, which specializes in entertainment properties, down by two thirds this month and yields over 25%. The list goes on and on.
Amazingly, all of these stocks were already cheap before this meltdown. They’re cheap beyond belief at this point.
Could some of these companies have to cut their dividends? Of course. These are tough times and anything is possible. But some of these companies are priced like they’re going out of business, and that’s unlikely.
There are sectors I’d still stay away from. You won’t see me nibbling on airline or hotel stocks just yet. There’s just too much uncertainty. But the values are out there if you have the iron stomach to buy.
So, do this today. Make a list of stocks you’ve always wanted to buy and the prices you’ve always wanted to buy them at. Check their prices. If they are in your range, make a small purchase. Or maybe a large one.
We should expect more volatility. I don’t believe this is over, and I’m not expecting a V-shaped recovery. But times like these are when fortunes are made.