The COVID-19 pandemic has been a difficult time for many of us. We all wish for a return to normalcy and to go back to the activities we all enjoyed before the virus hit our countries and communities around the world. But for Mr Market, it looks as if COVID-19 is already a thing of the past. Since its bottom in March 2020, the S&P 500 has rebounded 39.7% (as of 16 June 2020) and effectively reversed all its year-to-date losses in the space of just 11 weeks.
During the COVID-19 crash, we wrote a series of articles here, here, and here on how you could safely invest in the stock market during the uncertainty and highlighted some examples to our readers. But if you missed out on the COVID-19 crash and the subsequent rebound, the question right now is: Can you still invest?
Well, the answer is not a simple yes-no reply and there are a few things you need to take into consideration before you invest in the market at this point in time.
1. Don’t rush in because of FOMO
The first thing you don’t want to do right now is to rush into the market and start buying up stocks without any due diligence, because you think the market will rise some more. This would be a classic case of FOMO – the fear of missing out – where you don’t want to be left behind on the sidelines when everyone looks to be profiting from another stock market bull run.
However, FOMO will invariably lead you to buy stocks at higher valuations since you’re motivated to buy when markets are rising. And if you’re also the type that sells your stocks when the markets are crashing, you have a classic case of buying high and selling low (which isn’t a great way to make money, by the way).
It’s notoriously hard to tell which direction the stock market will go over the short run because no one has found a way to predict the collective behaviour and actions of millions of individuals who participate in said market every day. So if you’re jumping in to invest because you think that the market can only go up from here on out, the truth is no really knows.
2. Find out which stocks are still good value
While we can’t tell where the market is going to go, we can still tell if some stocks are still good value despite the run-up in stock prices over the past few months.
For example, Alphabet (the parent company of Google) bottomed at US$1,054 in March during the start the pandemic but has since rebounded to around US$1,400. If you invested in Alphabet back in March or April, give yourself a pat on the back because you’d be sitting on some nice gains right now.
But if you didn’t take action on Alphabet then, is it still a ‘good time’ to invest? We can find out by comparing its current valuation with its long-term historical averages. This is a chart of Alphabet’s P/E ratio over the last five years:
As you can see, Alphabet tends to trade between a range of 25 to 35 times earnings with its five-year median P/E ratio at 30.98. Alphabet’s current P/E ratio is 29.22. In other words, we could say that Alphabet is technically undervalued as it still trades below its historical P/E average.
(Side note: I used a median average instead of mean to account for the spike in P/E which was due to a one-time tax hit that Alphabet took to repatriate foreign-sourced income to the U.S.)
So while Alphabet isn’t cheap like it was a few months ago, I think it’s still relatively good value since we all know how wonderful a business Google is.
Like Buffett loves to say:
‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
And remember, we don’t buy a stock just because it’s cheap; we want to make sure that we’re investing in a high-quality company with wide economic moats and a long runway for growth.
3. COVID-19 can still affect industries down the road
Although the stock market has recovered to its pre-COVID levels, our economies are not out of the woods yet. The U.S. is seeing new outbreaks in the Sun Belt and West Coast as states strive to reopen their economies. In Beijing, the authorities confirmed 106 new cases after 56 days of no local cases. Much will depend on how governments work to contain any new clusters as soon as possible.
Due to this uncertainty, some industries may take a longer time to return to normal. For instance, industry insiders think that it will take two to three years for air travel demand to fully recover. Till then, we’ll see domestic tourism improve first and the formation of ‘travel bubbles’ to help reboot international tourism.
In the retail sector, sales plunged 16.4% for April in the U.S. In Singapore and Hong Kong, retail sales plunged 40.5% and 36.1% respectively. The good news is that we’re starting to see shoots of recovery as economies start to emerge from lockdowns, and prices of Singapore retail REITs have fairly recovered in anticipation of malls reopening.
However, question marks remain about what would happen if a second wave were to hit industries that are more vulnerable to the virus. So be aware of the risk that comes with investing in those industries. But if you keep a long-term view, our lives and economies will eventually recover from COVID-19.
4. If there are no opportunities, wait
I believe there are still pockets of opportunity around despite the recent run-up in stock markets. But if you’re unable to find an investment suitable for your portfolio, then wait. What you don’t want to do is to invest before doing any due diligence just because you have a serious case of FOMO.
In the meantime, build a watchlist of high-quality stocks, and continue to save and set aside funds for future investments. Because even though we can’t predict when the stock market will crash next, history has shown us that it certainly will again. And when the next crash happens, you want to ready for it once more.
The fifth perspective
The COVID-19 crisis was unique in the sense that it was the fastest market crash and recovery in history. From peak to trough, the S&P 500 declined 33.9% in the span of just 33 days, and then took 11 weeks to recover. In comparison, the Global Financial Crisis took three years to fully play out.
For those unprepared, the speed of the crash and recovery caught many by surprise. But for those who had a system of investing in place, the COVID-19 crisis was a great time to pick up many stocks at hugely discounted prices.
Will COVID-19 rear its ugly head and wreak havoc on markets worldwide once again? Your guess is as good as mine. But either way, our focus remains the same – which is to invest in high-quality companies whenever the opportunity presents itself.