Is the market crash a good time to buy stocks?
With coronavirus fears sending the market plunging, is it safe to invest? The experts weigh in.
The coronavirus-fuelled stock market crash has sent share prices plummeting amid unprecedented volatility, with the ASX200-index having fallen more than 30% since its February 20 peak.
Although unnerving, experienced investors know a crash can also be the best time to buy stocks at a discount. In many ways, it's like a property crash – an opportunity for new buyers to get into the market and ride the recovery.
Also read: How to buy shares online
To get a clearer idea of whether investors should be buying stocks now – or running for cover – I spoke to market analysts Elio D’Amato of Lincoln Indicators, Michael McCarthy of CMC Markets and Timothy Gilderdale of Implied Volatility.
When is the best time to buy?
Of course, the best time to buy a company's stock is when its price hits rock bottom before its recovery – unfortunately, nobody knows when that will be.
With stocks having fallen around 30% since February, executive director of Lincoln Indicators Elio D'Amato says long-term investors shouldn't be too focused on finding the perfect time to get in.
"Forget about trying to pick the bottom, because it’s a no-zero-sum game that never works," explains D'Amato.
"Focus on building positions and be excited that at least they’re cheaper today than what they were four weeks ago."
If the market were to continue falling for some months, history assures us that it will move up again eventually, even if it takes a few years to recover.
Will the market fall further?
Nobody knows for certain, however many analysts believe the market will continue falling for some time.
Considering the sheer size and speed of the market falls, CMC Markets' chief market strategist Michael McCarthy says that investors don't need to rush for a bargain.
"Looking at the price action in the markets, the arrows have continued to point downwards. So at this stage, there doesn't seem to be any compelling reason for investors to be jumping in," McCarthy says.
Senior options platform advisor of Implied Volatility Timothy Gilderdale agrees the charts indicate more selling to come.
"As an investor, we’d suggest being picky about what you buy for the time being... With the coronavirus starting to take off in the US and Europe, there may be a further fall in the market."
Markets have been supported in the last few weeks because ASX200 prices have stayed above the trend line (see below), which is around the 5550-5560 range for early 2020, according to Gilderdale.
"If the market experiences enough selling pressure to fall and consolidate below this support level, we would expect a large downward move as traders panic," Gilderdale told Finder on Thursday morning.
When the market passed the 5550 mark on Thursday afternoon, it would have been the marker of a "black swan event" to many traders – a market shock that indicates more panic selling to come.
Signs that the market is recovering
While it's not easy to predict when the market will recover, there are signs that investors can watch out for.
McCarthy says the key number is coronavirus infection rates. HIs view is that once that rate starts falling, we could start to see a market recovery.
The market is worried the slowdown could lead to a global credit squeeze, similar to what we saw during the global financial crisis (GFC). D'Amato believes this will be the biggest marker of a full market recovery.
"Once the market gains confidence that a freeze in the credit market is not likely to occur, then that would be closer to the bottom than anywhere else," says D’Amato.
Essentially, signs that the market is recovering could include:
- Global infection rates start decelerating
- We see coordinated action from global governments to cull the outbreak
- It becomes clear a credit squeeze isn't on the cards
- The end of the pandemic
What should investors be doing?
New investors should be watching the market, planning their strategy and writing out a shopping list of companies they'd like to buy, according to our three analysts.
“When we get a market crash, the big opportunity for investors is to buy top quality companies for bargain prices," says McCarthy. "I'd be looking at some of those top quality blue chips and businesses that are going to be around for a long time.”
A market crash is a good reminder that it's critical to have an investment strategy, says D'Amato.
"The market is going to correct 50% one day as sure as anything. The actors might be different, but the plot will be the same. So investors need to be cognisant of this and incorporate it as part of their investment plan."
That means knowing when you plan to sell the stock and at what intended price before you buy it in the first place.
"It's got to define part of your investment strategy. That’s what relieves the stress," says D'Amato.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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