The only time to buy stocks is…never as obvious as it seems

Saturday, 14 January 2023 — Albert Park

[3 min read]

Dear Reader,

The only time it makes sense to buy stocks is when they’re on sale. Unfortunately, a bit like Australian retailers, the stock market doesn’t exactly tell you when things are actually cheap, whatever the signs may claim about the supposed markdowns. You have to be a bit more careful than just following the ‘sale’ signs.

Using the filter of only buying during a crash, my career has seen four good buying opportunities.

The 2008 financial crisis created an excellent opportunity to buy up companies that were always going to recover eventually. Of course, they were beaten down less than those which went on to barely survive…or didn’t. But the time to buy was when a panic had infected the wider market. Any short-term loss in earnings and thereby dividends would be made up for in capital gains and future higher dividend yields.

The European sovereign debt crisis created similar opportunities. As did the chaos of 2018 and the pandemic plunge of 2020. Heck, by this measure, stocks create plenty of surprisingly regular buying opportunities. So why not wait for them before deploying your hard-earned savings?

Of course, in the midst of all these ups and downs, buy and hold has been an option too. The UK’s FTSE 100 recently hit a four-year high. But that’s still not far from its peaks in 1999, 2007, 2015, 2017, 2018, and 2019…

The German Dax looks similar for the past seven years. The ASX 200 is close to where it was in 2007. And let’s not mention the Japanese market…

So you can see why I’m only interested in picking up good stocks during crashes…

But has the crash of 2022 created the fifth great buying opportunity of my career?

Having just bought a house and acquired two children with birthdays within two and a half months of Christmas, I’m not sure the opportunity is quite there for the taking just yet…

But what about you?

What metrics might we look for to determine whether it’s time to buy?

Two down years in a row are rare for the US stock market. But US stocks crashed in 2022. Which tells you 2023 is likely to be an up year.

Before literally buying into this idea, you might want to look for a higher low in major stock indices like the S&P 500. Meaning that, adjusting for the usual to and fro of stocks’ gyrations, you notice that they are trending up.

This didn’t happen in June and July because stocks fell lower in October — a lower low. But it may have happened in December if stocks rally in the next few weeks.

It also pays to buy in at the point of maximum pessimism. And 2022 certainly featured plenty of that! It was literally the worst year ever for a 60/40 portfolio of US stocks and bonds…

How can 2023 be anything but a recovery?

The trouble is, on the other side of the argument, the statistics are equally convincing…

Markets tend to bottom out when central banks ride into the rescue, not when they’re still busy throwing out the economic baby with the inflationary bathwater.

We need to wait for rate cuts before announcing a bottom in stocks. And central banks are still announcing rate hikes. Even if there are fewer hikes less far and less fast than anticipated, it’s not the typical signal for stocks to turn.

And don’t forget that two down years in a row might be rare, but they do happen. The ‘70s and early 2000s are examples. And the second year of losses tended to outpace the first…

Not only this, but the examples that featured consecutive down years also seem rather relevant to today’s situation. They were years when central banks imposed recession to try and slay inflation or keep it bottled up. That’s what’s happening now.

If you believe it’ll take some time to put the inflation genie back in the bottle, you shouldn’t expect stocks to turn soon. How many times have we already had false pivots in monetary policy, after all?

The S&P 500 finished the year down slightly less than 20%. And, although it’s extremely rare for stocks to fall further after a 20% loss, in the years it was down between 10% and 20%, the subsequent year’s performance was positive only 63% of the time. That’s very different odds.

The statistics that claim 2023 will be a good year don’t mention which half will be good. The buying opportunity could come in mid-2023, not today.

And don’t forget; it was only really US stocks that truly crashed in 2022. Largely because the US dollar surged, so going out to buy Aussie stocks on the back of the statistics being touted in the media may be a bit of a mistake…

What about buying the stocks that were beaten down unusually badly in 2022? Tech stocks suffered disproportionately. Surely the sell-off is overdone and it’s time to get back in?

Well, asset bubbles are notoriously difficult to reinflate. The money that triggers a bubble tends to flow to something new instead. So, the tech and bond bubble of 2022 is unlikely to be followed by another similar sequence of events.

Instead, you should be looking at what the next bubble might be. And with the carnage of 2022 focused on US assets but not elsewhere, you won’t be buying 2023’s bubble on the cheap after a major correction.

When the opportunities on offer are simply not good enough, don’t make your move…yet. Keep your powder dry and wait for blood in the streets.

If you want specific strategies to help safeguard your wealth in the meantime, and even a low-risk way to get into the market after a crash, be sure to join fellow Daily Reckoning Australia editors Vern Gowdie and Bill Bonner in their four-part strategy session on ‘Avoiding the Big Loss’.

Until next time,

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend