A noted psychologist and professor at Princeton University, Daniel Kahneman, talked of having a “well-calibrated sense of your future regret.”

The interpretation of that for market participants is to control one’s emotions when endeavoring to make investment decisions anytime, let alone when there is enormous volatility such as we have been experiencing recently. Making impetuous choices about whether to buy or sell could lead to decisions that, with the benefit of hindsight, prove costly.

No one can control the stock market’s behavior because it is subject to the collective sentiment of a huge and dispersed investor base. However, an individual investor can control their emotional state, difficult as it may be at times, to make the best objective choice given his or her bespoke circumstance.

Keep calm during market volatility

It is when any one of us—professional or casual investor—allows greed or fear to overrun common sense, or a rational response to a condition, that too often leads to a regret later down the road. An all-too-real example includes investors who liquidated entire stock portfolios during the midst of the Great Financial Crisis and never repurchased shares early enough or at all to have earned the handsome gains produced by the stock market over the last decade.

Is the market decline of the last month disturbing? Of course it is. The drop in value is significant, and the speed at which it occurred is unprecedented. While there is no way to know when stocks will bottom and move higher on a sustained basis, we can look at certain metrics that may offer some insight into whether we are nearing a trough.

For instance, the number of stocks in a broad index like the Russell 3000 that are down 30% or more is much higher than in preceding declines of size in 2011, 2015-16, and 2018. In addition, sentiment readings for the stock market are extremely low while the CBOE Volatility Index (VIX)—the so called “fear gauge”—is at a level above its previous all-time high established in late 2008. Both of these suggest that stocks are oversold and due to stabilize, if not at least probe for a bottom.

Looking at another measure, the Value Line Arithmetic Index, an equal-weighted composite of a broad swath of New York Stock Exchange (NYSE) listed stocks, was just recently down 40% from its high, a plunge similar to other measured declines during economic upheavals in the past.

Indeed, the tape is getting pressed so hard that the percentage of S&P 500 stocks trading above their 50-day trend moving average, a technical look inside the market’s breadth, is near lows only seen a handful of times in the last quarter century. Encouragingly, the majority of instances in which that occurred were followed by sizable gains over the subsequent 12 months.

Look for opportunities  

Certainly, none of these suggests stocks will not go lower, nor do they indicate that volatility is going to subside, at least in the near term. However, for investors who may be thinking about flushing their equity portfolio now, it would seem to be an inopportune time. Conversely, for investors looking at this bear market as an opportunity to buy stocks, aggressive purchases either in size relative to one’s risk budget, or in speculative areas of the market, may do well to stage into positions instead.

Many high-quality franchises have been marked down to attractive levels. However, we know the outbreak of the coronavirus is still evolving, and healthcare officials continue to warn that it could worsen. Looking at the flattening trajectory in the case count that occurred in China and South Korea, and now perhaps even Italy, perhaps offers hope that they serve as an analog for countries elsewhere, including the U.S. If so, then we might expect the glide path to shallow in timeframe that cannot be short enough. Until then, all the measures taken by policymakers will help to mitigate the economic impact to some degree in the interim and ultimately propel a quickening pace of growth after the virus’ impact begins to fade.

Focus on the longer term

To reduce the risk of future regret, staying exposed to stocks in proportion to each individual investor’s objectives, and holding onto, or buying for the first time, the shares of great companies that have been liquidated by distressed sellers indiscriminately, should be the right calibration to achieve the rewards equities can provide over the longer term.

Disclaimer
Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis.

 

About the author

Mark Luschini

Chief Investment Strategist, President and Chief Investment Officer, Janney Capital Management

Read more from Mark Luschini

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/