- Volatility in the stock markets is finally easing.
- Stock prices are low, providing a good entry point.
- It’s best to invest small amounts regularly than trying to time a market bottom.
Last Wednesday, stocks posted their first consecutive gains since mid-February, suggesting that a month of dead cat bounces and significant declines could soon change course.
Investor optimism continues even as Donald Trump extended lockdown measures until Apr. 30 and said that the national death toll could exceed 100,000.
While the coronavirus is still spreading, here are four reasons why now is the time to buy stocks – not sell them.
1. Selling Fatigue Has Kicked In
UBS strategists said we are seeing a “selling fatigue” in the markets as investors no longer overreact to bad news.
Stock market volatility has finally cooled down after worries about coronavirus pandemic fueled weeks of sharp price swings. The Dow exited the bear market and entered a bull market on Thursday after hitting multi-year lows.
While there will likely be other declines, the rebound could give investors more courage to buy the lows knowing that there is potential for making a good profit.
2. Stocks Have The Best Risk-Reward Ratio In Two Years
According to Mike Wilson, Morgan Stanley’s investment chief, the stock market now offers the best risk-reward ratio in two years. Coronavirus risks have driven prices to multi-year lows.
While the risks of coronavirus persist and the U.S. economy is entering a recession, investors with liquidity can buy quality stocks at attractive entry points.
Apple (NASDAQ:AAPL) is one such example. The tech stock’s trailing and forward P/E are now 20.35 and 19.23, respectively, down from 24.70 and 22.17 at the end of 2019.
Wilson thinks the stock markets have already priced in a recession:
The market has been expecting a recession at some point. Bear markets tend to end with a recession, so we think the bear market’s ending.
3. Trying To Time A Bottom Before Buying Stocks Isn’t A Good Strategy
While stock markets are rebounding, there are chances they haven’t reached a bottom yet. We don’t know when the coronavirus will be under control.
To help support an economy hit by the coronavirus pandemic, Donald Trump signed on Friday a $2.2 trillion economic rescue plan.
The U.S. stimulus package is the largest of all time, but might not be big enough as infection rates are rising.
USB strategists, led by Bhanu Baweja, said in a note:
However, both because infection rates are likely to keep rising for some time, and also because in cash equity markets we have not yet seen a capitulation in the core positions in growth style stocks, it may be early to say a firm bottom has already been made.
While stocks may not have touched the bottom, investors should avoid trying to time when that occurs. Doing so is notoriously difficult and it could come at the expense of significant returns. Investors are better off re-entering the market at price levels they’re comfortable with.
Volatility can be your friend if you regularly contribute to your portfolio. If you contribute to a 401(k) twice a month, you increase your existing holdings by buying stocks at different prices. When prices are lower, you buy more shares. When prices are higher, you buy fewer shares. This strategy is called dollar-cost averaging.
As frustrating as falling stock prices are, keep in mind that buying more shares at low prices puts you in a stronger position when prices start to rise again.
It’s less risky to buy stocks in small amounts now than in large amounts, as the stock markets might not have reached a bottom yet.
This article was edited by Sam Bourgi.