When this kind of volatility hits the market, you absolutely need a plan. That's exactly what we'll give you today.
Make no mistake: This type of volatility in the market is historic.
Last week was the worst for markets since the 2008 financial crisis. All major indexes fell into correction territory and are now approaching bear market levels.
The Dow Jones Industrial Average dropped nearly 3,600 points (12.4%) last week alone.
Yesterday was a completely different story. The Dow rocketed 1,200 points higher. It was the largest daily point gain in the history of the Dow.
The question on everyone's mind: How long will this stock market volatility last?
Unfortunately, there is simply no telling.
The coronavirus epidemic is something economists refer to as an "exogenous shock." That means it's an impossible-to-predict event that didn't stem from the economy. The terrorist attacks of Sept. 11, 2001, are another example.
How far and fast the market will drop depends on how much the global supply chain is disrupted. Unfortunately, it's still too early to tell.
Another factor moving markets is the U.S. Federal Reserve. This morning (Tuesday), the Fed made the surprising announcement that it's cutting interest rates between meetings. The central bank dropped rates 0.5%. That's the same move the Fed made after 9/11.
What the market does next is anyone's guess.
Today, the Dow has been down as much as 608 points and up as much as 285 points. And that was all before noon.
There's only one thing that's certain: Investors need a plan going forward. Wild swings in the market can lead to panic and emotional investing decisions. That's the worst thing you can do.
For guidance, we turned to Money Morning's experts, who have seen it all over their decades in the market.
Here's what's next for the markets - and how you can plan ahead...
According to Money Morning Executive Editor William Patalon, III, it's likely there are more down days ahead for the market. There are several reasons why.
The first is the high valuations.
"Before the sell-off got rolling, U.S. stocks were expensive on a valuation basis," Patalon said. "The S&P 500 was trading at 18.9 times projected earnings. That was up from 16.2 a year ago and - save for a brief moment in early 2018 - it was the highest forward P/E for the index since May 2002."
"In short, stocks were expensive," he said. "That magnifies risk at any time. But risks are particularly exacerbated when earnings forecasts begin to wobble."
Companies across every industry have been cutting earnings forecasts. Analysts at Goldman Sachs Group Inc. (NYSE: GS) estimate corporate profits could drop 13% this year. They had previously expected profit growth of 7%.
Of course, that stokes fears of a recession...
"Coronavirus fears, worries about the stock market and the economy could turn into a self-fulfilling prophecy - with consumers canceling vacations and cruises and then pulling back on big-ticket outlays, and other discretionary purchases," Patalon said. "Investors dumping stocks could exacerbate those worries in a visible, but ancillary, way - by prompting consumers to further cut back on spending. That, in turn, will further squeeze corporate earnings, leading to additional share-price declines - with this cycle feeding on itself until a 'bottom' is reached."
While all of this is concerning, it's more important than ever to keep it in perspective.
As the old saying goes "stocks take the staircase up and the elevator down." So the drops always feel much more painful and sudden than the gains.
Patalon points to research from Barron's that says stocks have lost $4.6 trillion since peaking just a few weeks ago. But they've still accumulated $6.3 trillion since the sell-off in December 2018. Since the start of 2016, the Dow is still up 46%.
Don't get blinded by the near-term headlines. Yes, the markets could and likely will dip more. But maintain a long-term focus. Staying disciplined can be extremely difficult, but it's imperative.
Once you've maintained that mindset, here's how to act...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
According to Patalon, this is an excellent time to take advantage of Wall Street's volatility.
"Don't panic in the near term, and use the pullbacks to 'Accumulate' good wealth plays you're going to 'go long' with," Patalon said. "I call it the 'Go-Long/Buy-Good' strategy."
It's a strategy Patalon has been recommending to Money Morning readers since its inception.
"I've fine-tuned it a bit by using the 'Accumulate' approach to maximize its power," he said.
"You establish a foundational position in the stocks you like - and then add to those holdings on pullbacks or as you get more cash."
It's a similar strategy to what Money Morning Chief Investment Strategist Keith Fitz-Gerald has been telling readers.
"Most people don't think this way, but remember how the game is played. You buy low and sell high," Keith says. "So believe it or not, what you want to do is buy in on big down days, knowing full well that volatility cuts both ways."
"That takes nerves of steel, because nobody knows when the markets are going to rebound. But we do know that history is very clear that they will. It's a function of growth, not headlines."
Keith suggests keeping a list of "must have" stocks nearby at all times. Any time the market makes a big move (like it has this week), you can pounce on these stocks and get in at discounted prices.
If you need stability right now and can't afford to take losses on stocks, then gold is a great choice.
You don't want to put all of your money in gold, but a small allocation between 2% and 5% is a good balance to volatile stocks.
At Money Morning, we like the SPDR Gold Trust ETF (NYSE: GLD). It's liquid, reliably tracks the price of gold, and has a low fee structure. You get the benefit of owning gold without the inconvenience.
Another profitable strategy is options trading. In the last week, we've shown readers two options strategies that resulted in gains of 450% and 50%. We've just released another today as well. Click here for more information.
Learn How You Can Predict the Future of the Stock Market: This little invention is why Tom Gentile's able to collect four separate paydays in under 60 seconds - and why he can see major paydays long before they happen. Learn more...
Follow Money Morning on Facebook and Twitter.
