I imagine you’re worried…
Yesterday marked the worst day on Wall Street since 2011.
After a failed OPEC production cut deal and a jump in U.S. coronavirus cases, the S&P 500 dropped by a staggering 7.11%.
Is this a sign of bad things to come?
Are we headed to recession?
Is now the time to start selling stocks?
I’m sure those are questions you must be asking yourself, which is why I want to remind you—don’t panic.
While it’s true that we’re dealing with a black swan event that will have negative implications on the global economy, the situation is far from hopeless.
Here’s what you can expect to happen in the coming months.
Things Could Get Worse… But Not By Much
Let’s start with the negative.
First, you should understand that the situation could get worse before it gets better.
That’s the unfortunate reality right now.
There’s a high probability the number of coronavirus cases in the United States could jump from here, especially in big cities like New York.
Either way, the ongoing pandemic will put on hold many daily activities and business operations, just as it did in China.
Ultimately, this will lead to an economic slowdown, and quite possibly a “mini-recession.”
I say “mini-” because it is questionable whether the market contraction will last beyond six months. Once economic activity begins to pick back up, it will do so robustly… but more on that in a moment.
The market is already pricing in the likelihood of a recession, and at worst, I see stocks declining by another 15%. This would push prices to around 30% from their all-time highs, which also means, we’re getting close to the bottom.
Now, let’s focus on the positive. Because if you play this situation smartly, there’s a good deal of money to be made.
My Advice For You…
Yes, you read that correctly.
You might think I’m crazy to make such a recommendation in such troubling times, but hear me out.
Dramatic as this contraction may seem, it won’t last long.
When the economy turns around again, and trust me it will, stocks are going to bounce back rapidly… and you’re going to wish you dared to buy when the market was at its lows.
How can I be so sure of it?
First, central banks are going to throw everything they can at this problem. That means more money printing, and, in the case of the United States, zero-percent interest rates. This means that companies are going to be awash with capital to invest in their businesses or repurchase shares.
Second, governments are going to throw everything they can at this problem as well. Fiscal stimulus, tax breaks, loan coverage, and so on… again, this will benefit corporations and keep unemployment levels low.
Third, we will have record-low energy prices, which will also benefit economic growth.
Fourth, when the Fed cuts to zero, mortgage rates will be at record lows, which will put more money in people’s pockets to spend.
And fifth, this crisis wasn’t caused by a bubble, but rather by a freak occurrence. So, a prolonged bear market where financial excess needs to unwind is again out of the question.
So, all-in-all, the situation is hardly as dreadful as the media portrays it to be.
Yes, the economy will take a hit from the coronavirus, but it will bounce back, and it will do so strongly. I expect the turnaround to happen before the end of 2020.
Therefore, I continue to recommend that you keep buying quality stocks at these levels, even if that goes against your primary emotions.
Because ultimately, it’s reason that should be driving your investing decisions, not fear.
A Final Word Of Advice
Naturally, there will be some victims.
The ones hurt the most from this fiasco, will be those that invested in high-yield debt.
High-yield ETFs consisting of low-grade corporate bonds have become popular in recent years with investors searching for extra cashflow.
It’s something I’ve been warning you about for more than a year, and I hope you listened to my advice.
If you haven’t already, sell all such investments immediately.
Over the past year, I’ve also been urging you to add gold stocks to your portfolio.
Gold works great as a protection against market volatility, which is evident in its recent performance.
And just because I’ve been recommending it for a while, this doesn’t mean it’s too late to start investing in gold companies. Over the next decade, volatility will persist, and the price of gold will increase much more. You can read more about why that is here.
I suggest you add at least 10% to precious metals, though if you prefer to play it safe, allocate 20%.