Good Morning,
Question of the day: Is the Market Slide a buying opportunity?
Last week’s stock market horror show is the second serious correction of the year. A 10% drop is the threshold for a market correction. 20% means we are in a bear market. So, is there more to come or is this October slide a welcoming buying opportunity?
The market fears US President Donald Trump will lead his country into an international trade war, a no deal Brexit disaster, Italy’s budget worries with the EU and most important, a stop on corporate profit increases.
But there is no hint of a recession so far. The US Federal Reserve Bank still is keen to hike rates in December. The stock market’s biggest driver, earnings growth still looks pretty comforting. 22% this year, 10% expansion next year and 9.5% in 2020, still pretty good historically.
Stocks might be on sale here. Consider the tech high-fliers, which used to be the main engine of the bull market.
Facebook is a good example: In last winter’s correction, it dropped 11%. A great opportunity to buy and get in again. Facebook bounced back big times, only to get hurt again this fall amid all the bad headlines surrounding it. But earnings do well. Result: Facebook stock is even more affordable than ever. The price/earnings ratio (PE) is currently at 22, down from 34 at the start of the winter correction.
Or Google parent Alphabet has a current P/E of 46, where previously it was above 60.
Amazon trades at 130, that’s nearly 50% less than the winter P/E ratio of 234.
Gross domestic product (GDP) growth is still going strong, unemployment is very low and a weaker USD in the future could make US exports cheaper. Do we have to worry the party is all over now?
For now, this appears to be another pause. And a good chance to pick up quality stocks at a cut-rate price. For Contrarians this is the right time to start buying again. Volatility is high. You might consider selling options with lower strike prices, to pick up stocks at even lower levels. CNN’s Fear & Greed Index stands at 8 (Extreme Fear). At the height of the financial crisis, this Fear & Greed index sank to 12. The index gained some ground to 28 before stocks finally bottomed out on March 9, 2009 and the latest bull market began. For Contrarians this is another indicator that tells them to dig in and buy.
Challenging times ahead. If you do not buy a lottery ticket, you can not win. Trying to time the market is close to impossible. Market Timer often miss the big moves and stay on the side line. Staying put and watching is like hoping to win the lottery without having the necessary ticket.
Sven Franssen