Big Stock Losses Don’t Always Mark a Good Time to Buy
Big Stock Losses Don’t Always Mark a Good Time to Buy
Some bad stock advice that’s frequently repeated is to buy a stock because it’s down a lot from its peak.
Something I’ve heard variations of many times is, “It’s down 70%. That makes it a good buy.”
The data don’t support that argument. Stocks that decline 60% or more tend to be relatively new issues that were priced to perfection based on highly optimistic scenarios about their future. In other words, the stocks were in bubbles.
Investors bought the stocks looking for the next Microsoft, Google, or Amazon. Those types of stocks are very rare and difficult to identify in their early stages.
That’s why investors usually are attracted to baskets of stocks with a similar theme or story. The stocks tend to rise and fall as a group.
History shows that even after a significant decline, such stocks often have much further to fall.
Consider the technology stock boom and bust. A basket of highly valued, popular tech stocks soared in price from 1998 to 2000. But it tumbled from the peak.
If you had purchased the basket in mid-2001, after prices had been declining for a year and half, the subsequent returns still would be less than the major market indexes and would be flat to negative through 2007, according to Bridgewater Associates.
Among the largest companies in that basket, only Amazon and eBay had positive returns from the bubble peak through 2015. Most of the others were down 75% or more or were no longer trading.
Stocks based on stories and themes can be profitable investments in the short term. But at some point, only fundamentals matter.
Most of the stocks in the pandemic stock bubble still have limited revenue and prospects for profitability. They might be down 70% or more from their peaks, but the prices of many are likely to decline further.
The Influence of the Pandemic Stimulus on Today’s Inflation
The fiscal stimulus engaged in during the pandemic caused a large part of the recent inflation, according to a new study published by the Federal Reserve Bank of St. Louis.
The economists who conducted the study found that the fiscal stimulus increased aggregate demand for goods and services without increasing supplies.
They analyzed data from a number of countries and found that, while the economic lockdowns and reduced mobility were the main drivers of economic activity, the fiscal stimulus shaped how people reacted.
Significantly, countries with larger fiscal stimulus experienced smaller decreases in consumption during lockdowns and stronger rebounds when their economies reopened.
But the fiscal stimulus didn’t improve production.
The result was stable or increased demand at the same time supply was decreasing. This created imbalances in which demand exceeded supply.
Within the broad consumption picture, demand for services declined substantially during the lockdowns. But demand for goods decreased modestly initially and then rebounded strongly. Consumption of goods has remained above pre-pandemic trends.
The researchers estimated that for the United States the fiscal stimulus contributed to an increase in inflation of about 2.6 percentage points.
Social Security’s Little-Known Safety Net
The recent annual report from the Trustees of Social Security and Medicare estimated that the trust fund backing Social Security retirement benefits will run out of money in 2033. (See the April 6 Bob’s Journal for details.)
But that might not be the end of the story.
There’s a second trust fund that supports Social Security disability benefits. Not long ago that trust fund was estimated to be in danger of running out of money long before the retirement trust fund.
But changes were made in disability claiming procedures that resulted in far fewer people being granted Social Security disability benefits. Now, the disability trust fund is in good shape and is estimated to last much longer than the retirement trust fund.
The trustees report the results of the two trust funds separately, but they also report the results of the combined trust funds as though they were one entity supporting the two programs: retirement and disability.
This is important because the law allows the Social Security system to tap one trust fund to pay benefits for the other program. If Congress doesn’t act before the retirement trust fund runs out of money in 2033 or so, benefits won’t have to be reduced automatically.
Instead, the trustees are authorized under the law to use money from the disability trust fund to pay benefits for the retirement program.
In the annual report, the trustees projected that if this is done the combined trust fund would last until about 2044. After that, of course, both trust funds would be empty, and Congress would have to shore up both programs, or reduce benefits.
Tapping the disability trust fund wouldn’t be a great solution, but the option should give additional comfort to those who worry their retirement benefits would be eliminated or cut after 2033.
The Data
The Consumer Price Index (CPI) rose 0.1% in March, down from 0.4% in February. Over 12 months, the CPI increased 5.0%, compared to 6.0% at the end of February. The March level is the lowest in almost two years.
The core CPI, which excludes food and energy, increased 0.4% in March after increasing 0.5% in February.
Over 12 months, the core CPI increased 5.6% as of March, compared to 5.5% as of February.
The Small Business Optimism Index from the National Federation of Independent Business (NFIB) declined to 90.1 in March from 90.9 in February.
March’s level is a three-month low, and the 15th consecutive month the index is below the 49-year average of 98.
The index also is below its low point during the pandemic, and the percentage of business owners who say this is a good time to expand declined to the low levels of the financial crisis.
The good news is the percentage of small business owners who reported inflation as their top problem continued to decline and now is only 24%. Inflation still is cited as the top problem by a higher percentage of business owners than any other issue, but it edges out quality of labor by only one percentage point.
Last week’s Employment Situation reports estimated that 236,000 new jobs were created in March, down from 326,000 jobs created in February but still indicating strong job growth.
Average hourly earnings increased 0.3% for the month and 4.2% for the last 12 months.
New unemployment claims fell 18,000 to 228,000 in the latest week. But the previous week’s claims were revised substantially higher to 248,000 from the 196,000 that initially were reported.
The revisions were part of a major restatement using new methodology that concludes claims were much higher than initially reported going back to 2018.
Continuing claims, which lag a week behind new claims, increased to 1.823 million from 1.817 million.
The Markets
The S&P 500 rose 0.26% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.89%. The Russell 2000 increased 1.07%. The All-Country World Index (excluding U.S. stocks) added 0.18%. Emerging market equities advanced 0.33%.
Long-term treasuries lost 0.12% for the week. Investment-grade bonds fell 0.25%. Treasury Inflation-Protected Securities (TIPS) declined 0.08%. High-yield bonds were unchanged for the week.
In the currency arena, the U.S. dollar rose 0.58%.
Energy-based commodities increased 0.87%. Broader-based commodities rose 0.88%. Gold declined 0.94%.
Bob’s News & Updates
My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here, respectively. You can be among the first to write a review.
My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.
The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.
A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”
If you’re interested in my books, check my Amazon.com author’s page.
I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.
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