The multi-thousand point decline in the Dow Jones Industrial Average shook many investors to the core. Unsophisticated market participants were dumping stocks and moving quickly into supposed safe asset classes as “end of the world” pundits stoked the flames of fear.
At the same time, the radical plunge set up the best buying opportunity of the decade for those who understand how markets really work.
This article will lay out seven compelling reasons why right now is the buying opportunity of the decade.
1. The Stock Market Is Designed To Move Higher
The very design of the stock market creates a tremendous upward bias. Take a look at any significant index chart from the inception of the U.S. stock market. Every single long-term chart reveals an upward trending pattern punctuated by short pullbacks. All sell offs are bought, and the market ends higher than it was before the pullback.
Now, to be sure, I am talking about the long term, not the short term price gyrations that appear random. No one can consistently time market moves successfully, therefore long-term investing is the only proven wealth-creating strategy.
2. Price Corrections Are Normal
Despite the considerable point plunge in the major indexes, the market gave up around 10% overall. Historically, 10% corrections occur approximately once per year, so this one is no different than the average. Remember, a bear market is generally defined as a 20% decline from peak to trough on the price chart. Under the standard definition, the February plunge was just a pullback that should be expected by every investor.
3. Price/Value Disconnect
One of the primary tenets of successful long-term investing is that there is a significant difference between price and value. When there is a disconnect between price and value, it creates buying opportunities.
Price is the cost of something; value is what it is worth. Stock picking becomes much more comfortable after a sell-off. The reason for this is share prices plunge, but the intrinsic value of the company remains the same.
Warren Buffett extracted billions from the stock market using the time-proven strategy of value investing. Every pullback creates a bullish disconnect between price and value. Smart long-term stock market investors are using this disconnect as a buying opportunity!
4. Losses Are Part Of The Game
I can hear some of you now, “Yeah, I understand what he is saying, but my portfolio just took a big hit.” I can definitely empathize with you, as the pullback hurt every bullish, long-term investor. However, realizing that losses are part of investing makes them a little easier to mentally accept.
One way to soften the blow of pullbacks is to institute a tactic known as dollar-cost averaging — investing a fixed amount in regular intervals over a period of time. Set aside a certain amount of money to invest on a regular basis into a stock or overall market, regardless of the share price. Should a pullback occur during your dollar-cost averaging purchasing campaign, your total cost basis will be less than if you purchased the shares all at once.
Another thing to remember is to always keep some cash, or “dry powder,” available to take advantage of market corrections. If you are 100% invested when a correction occurs, it’s impossible to buy the bargains.
5. Earnings Have Been Great
The latest reading indicates that of the S&P 500 companies that reported quarterly results, nearly 80% beat estimates.
These readings are the top above-estimate earnings since the third quarter of 2009, according to Thompson Reuters. For sales estimates, it’s the best over the last 16 years. In other words, company fundamentals remain very strong.
6. The Overall Economy Is Soaring
Things are very healthy in the United States and the developed world. Inflation remains very low despite worries of it climbing. Also, equity fund flows are below all-time highs but positive, indicating powerful price growth potential. Positive housing reports, combined with a weaker U.S. dollar, further cement the economic growth thesis.
China, the world’s second-largest economy, has stabilized and is showing signs of growth, adding to the bullish picture.
7. Trump’s Tax Reforms
We have not even started to see the benefits of the Trump administration’s corporate tax initiatives.
It is very rare to see all seven of these bullish factors coming together at the same time.
Risks To Consider: The market can and does crash for inexplicable reasons. No matter how bullish the economic picture, stocks can decline in value.
Action To Take: Now is the perfect time to buy bargains in the stock market.