- The coronavirus crash we see is one of the greatest ones in history.
- Nobody can see the end of it.
- Buying stocks now on low prices can be a good idea.
- But also a terrible one.
- See what past crashes teach us.
The Real Coronavirus Crash Is Here
The last two weeks made history. That was one of the worst stock market declines ever. The real, huge coronavirus stock crash arrived I described 17 days ago. Experts are still discussing if the coronavirus crash it is the 3rd or 2nd biggest in history. Or, by some measures, the first one. “The fastest-ever descent from an all-time high” – wrote, for example, Bloomberg.com.
Friday, March 20, the main US stock indexes were 28-32 percent below the values seen on February 19. European indices like the Stoxx 600 or the DAX closed 36 percent lower, the Brazilian Bovespa fell 42 percent. Europe is the center of the “new coronavirus” epidemic now. Every day other borders, institutions, companies, factories, schools are closing. (The problem can be, every country takes other measures. The defense is not so coordinated and the authorities not so rigorous like in China.) On other continents, like Africa or South America, the virus seems to be beginning to spread.
To Buy the Crash, or Not to Buy the Crash?
So, the fight is not over, and perhaps, the stock market crash either. The market entered officially the bear market territory with more than 20 percent falls. But most bear markets are much longer. The duration of these periods is usually some months or a few years. We do not know how long the epidemic will last, nor how long the bear will roar. (The bear is a symbol of longer stock price falls, and the bull is a symbol of price increases.)
But we can still ask the question: It is worth buying this coronavirus stock crash, or not? An exact answer would be a lie since no one can know it. Too many uncertainties out there. The outcome of the crisis depends on too many variables. The spread of the almost unknown virus, the measures taken by politicians and central banks, the reactions of people and companies, institutions. What we can do is study the outcomes of other crashes and bear markets in the past.
Trying to buy cheap
It is clear that the cheaper we buy, the better our long-term returns. But it is also possible that there will be a much better time to invest in the future. Especially if the virus manages to push the world into a long-long recession. The bear market by definition begins with a fall of twenty percent. But, there have also been much larger slopes of 30 to 40 percent and even 80 percent. ( See here)
Buying on the bottom of these crashes was a good idea, we see it subsequently. But in the middle of the crash, it is impossible to know where this bottom is. Is there a general rule, a measure that we can always use? A percentage drop where to buy in the past has always been a good idea? Can we apply this to the coronavirus crash?
Earnings of Crash Buying
Let’s study “crashology”, the outcomes of past stock buying. I made my calculation of the returns of persons who bought stocks after big falls. That means, in the last 119 years, since 1901, and at 25 percent downturns.
The data showed there were 1436 days when the S&P 500 index reached a new all-time high. But often, the records came in a row, in series. With new peaks emerging day by day or week by week. There were only 41 cases where the record was not followed by another for at least three months. That means the index has formed a longer-term peak. Among these, there were only 11 periods when the index fell at least 25 percent between two such long-term peaks. I analyzed these 11 cases further.
Well-Known and Long-Forgotten Bears
Some of these 11 events may sound familiar. Like:
- The peak of October 9, 2007, with the Lehman-crash after it, in September 2008. (Lehman Brothers filed for bankruptcy protection on Monday, September 15, 2008.)
- The highs of the “dotcom-bubble” in March 2000, and the downturn. Which reached the 25 percent loss watermark on March 20, 2001.
- The famous big “Black Monday” crash in 1987. Some of the indexes outperformed this only in March 2020 the first time.
- Of course, the Great Crash in 1929.
Other lows are more or less forgotten. These events aren’t always sudden crashes, like the coronavirus crash or the Black Monday. Some lows are the result of slowly dropping prices. Do you remember the lows in 1982 and the highs in 1980? Probably, not. Nor other similar events in the 70s, 60s, 50s. Most investors have no idea anymore.
Results of Buying Low
In the table, you see the 11 cases I found. In the 40s and 50s, there are no cases because the prices were mostly stagnating or falling. There weren’t new long-term tops on the horizon. Without real peaks, I couldn’t find any drawdowns either. In 1956, for example, I found a top but the bottom in 1957 reached only 24 percent, approximately. (Larger version of the table at the end.)
Tops and Lows of the S&P 500 Index
|(Tops of the S&P 500 Index and -25% Lows from Top. Returns from Those Lows)|
|Date of the top||Date of the low||1y return||3y return||5y return||10y return|
|Sep-09, 1902||Jul-24, 1903||6,1%||12,3%||3,9%||1,9%|
|Jan-19, 1906||Mar-14, 1907||-10,0%||7,4%||2,7%||2,1%|
|Nov-20, 1916||Oct-09, 1917||2,7%||0,9%||3,2%||7,6%|
|Sep-07, 1929||Oct-28, 1929||-21,5%||-32,6%||-17,3%||-5,4%|
|Dec-12, 1961||Jun-14, 1962||29,3%||16,1%||11,3%||7,0%|
|Nov-29, 1968||Apr-28, 1970||30,5%||10,1%||1,5%||2,7%|
|Jan-11, 1973||Apr-25, 1974||-3,3%||3,2%||2,7%||5,8%|
|Nov-28, 1980||Aug-05, 1982||53,8%||22,1%||24,6%||15,0%|
|Aug-25, 1987||Oct-19, 1987||24,3%||10,8%||12,9%||15,6%|
|Mar-24, 2000||Mar-20, 2001||0,8%||-1,0%||2,7%||1,1%|
|Oct-09, 2007||Sep-17, 2008||-7,9%||1,7%||8,0%||9,6%|
The results you can see in the “return” columns. The returns were very different. For example, buying the 25 percent low in 1929, was a terrible idea. Prices continued to fall for many, many years. The market hadn’t recovered even in 10 years. In all the other ten cases, the ten-year returns resulted positive. The same happened in the five years from buying.
Bear Market Rallies in the Crashes?
In one and three years from the lows, the returns are different, sometimes negative. But the averages are still positive. In three years, 4,6, and in one year, 9,5 percent p. a. It is interesting why are one-year returns much higher on average than longer-term ones. That can be some sort of “bear market rally”. Although, Investopedia describes this phenomenon as a short-lived rally of days or some weeks.
Conclusion for the Coronavirus Crash
Conclusion? By these data, buying in the crashes has mostly a positive return in the next years or one decade. But not always and not an extraordinary one. To be more correct, the results are very different. In some cases, brilliant, in other cases, horrible. Every case seems to be unique. The average returns are not far from the general returns of the stock market.
It seems that there is no automatic, mechanic method. Or, a 25 percent drawdown from the top is simply too early to buy the crashes. But I’m (almost) sure buying stocks here and now, 30-40 percent from the tops will be a good investment in the long term. Much better than buying every other time in the last couple of years.
(If you change 25 percent drawdown to 30 or 40 percent, you will find less similar tops and lows. Those are very, very rare.)
Did I Tell You?
I could say “I told you” because I was suggesting in my previous post the coronavirus can push stock prices much lower. I reality, I admit I wasn’t very sure. Two-three weeks ago there were hopes Europe and the USA can stop the epidemic. But today, it seems to be much worse. (See my post: To Buy Or Not to Buy? Was This All the Stock Market Coronavirus Crash?)
I can’t give predictions or advice, just talk about probabilities, possible opportunities. Whoever claims to accurately foresee the result of such complex processes is usually mistaken or lying. Even the world’s most successful investors, the wealthiest billionaires, gurus don’t know. So be sure to read the disclaimer and make your research, independent decision.
Dividends and Fees
Don’t forget that the S&P 500 index doesn’t contain the dividend payments, nor taxes and brokerage fees. The real return of the investments was, in the practice, always different than indicated in the table. I plan to repeat this small analysis with other stock markets and indices in the future. There are so many promising stock markets outside of the USA.
A larger version of the table, with index values (daily closing):
Tops and Lows of the S&P 500 Index (large version)
|(Tops of the S&P 500 Index and -25% Lows from Top. Returns from Those Lows)|
|Date of the top||Index value on the top||Date of the low||Index value of the low||Low + 1y index value||Low + 3y index value||Low + 5y index value||Low + 10y index value||1y return||3y return||5y return||10y return|
|Sep-09, 1902||9,48||Jul-24, 1903||7,06||7,49||10,01||8,56||8,54||6,09%||12,34%||3,93%||1,92%|
|Jan-19, 1906||11,18||Mar-14, 1907||8,13||7,32||10,08||9,31||10,02||-9,96%||7,43%||2,75%||2,11%|
|Nov-20, 1916||11,32||Oct-09, 1917||8,47||8,7||8,69||9,93||17,54||2,72%||0,86%||3,23%||7,55%|
|Sep-07, 1929||31,92||Oct-28, 1929||22,74||17,86||6,95||8,81||13,08||-21,46%||-32,64%||-17,27%||-5,38%|
|Dec-12, 1961||72,64||Jun-14, 1962||54,33||70,25||85,12||92,62||106,86||29,30%||16,14%||11,26%||7,00%|
|Nov-29, 1968||108,37||Apr-28, 1970||80,27||104,77||107,23||86,62||105,16||30,52%||10,13%||1,53%||2,74%|
|Jan-11, 1973||120,24||Apr-25, 1974||89,57||86,62||98,44||102,2||158,02||-3,29%||3,20%||2,67%||5,84%|
|Nov-28, 1980||140,52||Aug-05, 1982||105,16||161,74||191,48||316,23||424,21||53,80%||22,11%||24,63%||14,97%|
|Aug-25, 1987||336,77||Oct-19, 1987||224,84||279,38||305,74||411,73||955,25||24,26%||10,79%||12,86%||15,56%|
|Mar-24, 2000||1527,46||Mar-20, 2001||1142,62||1151,85||1109,74||1307,25||1279,2||0,81%||-0,97%||2,73%||1,14%|
|Oct-09, 2007||1565,15||Sep-17, 2008||1156,39||1065,49||1216,01||1697,6||2904,98||-7,86%||1,69%||7,98%||9,65%|
More Important Readings for You About Your Money
- To Buy Or Not to Buy? Was This All the Stock Market Coronavirus Crash?
- Can You, Indeed, Build a Decent Passive Income with Stocks?
- Looking for a Good Investment Return? Use the Magic Triangle!
- 6 Effective and Proven Ways to Lose Your Money
- How Works Compound Interest? Learn the Secrets of the Dark Side
- Eight Ways How Inflation Threatens Your Income and 13 Ways to Fight It
- Is It A Myth? – The Genuine Truth About Passive Income
(Cover photo: Free-Photos from Pixabay. The bear is the symbol of a declining stock market.)
I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.