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Sharp Drops Are Times To Buy, But Do Not Expect A Quick Turnaround


  • The market's sharp downward moves offer long-term investors a buying opportunity, in my view.
  • While the coronavirus is likely to disrupt economic activity for some time, history shows us that world stocks often recover from these types of events in the short-term.
  • However, investors need to stay grounded here. While a 10% drop seems large, equities were trading well above historical norms.
  • There have been downward revisions for earnings forecasts for the S&P 500, and that will be a headwind going forward.

Main Thesis and Background

The purpose of this article is to evaluate the current state of the equity market in the U.S. to decide how appropriate it is for investors to initiate new positions now. Towards the end of last year, I began reducing my equity exposure, which did not appear to be the best move at the time as the market continued higher. A few weeks ago, I reiterated the rationale for this positioning, when I reviewed the broad state of the market and continued to express caution.

Looking back now, this caution has now been vindicated. While the market was flat to positive in the days immediately following that article, this past week has had one of the worst sell-offs in years, with the broader market falling over 10%, and at a rapid pace, as shown below (through 2/27):

Source: Bloomberg

While being more defensive has paid off in the short run I, and many other investors, are likely thinking about adding to equity exposure to take advantage of the sell-off. Simply, I believe this is a good idea, and I have begun increasing my equity position over the past few days, and will continue to do so if the market decline continues going forward. However, I want to highlight some concerns I still have, and to recommend investors approach new positions carefully and within their risk tolerance.

Specifically, while I see better entry points in the market today, I need to point out that stocks are still not "cheap". The market was quite expensive on a historical basis before the sell-off, and a 10% drop is not really enough to put us in value territory. Therefore, I believe investors would be wise to maintain proper hedges, even if they decrease them to some degree. Further, while I generally believe equities will recover from a virus-induced sell-off, history shows that

This article was written by

Dividend Seeker profile picture

I've been in the Financial Services sector since 2008, which gives me an invaluable insight in how markets can turn. I currently work for a large-cap US Bank in funds management. I was a D1 athlete in college (men's tennis) when I got my Finance degree. I received my MBA in 2013 in North Carolina.

My readers/followers can trust that I won't pump any investment nor discuss a topic I don't genuinely follow and research. In that spirit, I list my portfolio here for transparency

Broad market: VOO; DIA, RSP

Utilities: VPU, BUI 

Energy: VDE, RYE, IXC

Innovation: GINN, QQQ


Dividends: DGRO; SDY, SCHD

Municipals/Debt Funds: BGT, Individual muni issues (NC)


Cash position: 25%

Analyst’s Disclosure: I am/we are long VTI, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (31)

Dividend Seeker profile picture
Really strange day today, hard to make sense of it
Seatonmanagement profile picture
Going to be like a repeat of 2018 I suppose.
Dividend Seeker profile picture
Going to be a lot of volatility for sure. Tonight's primaries could rattle some nerves this week. I imagine one of the reasons for yesterday's push higher was a few moderates dropping out of the race and supporting Biden.
Good day to pick up some SPY. Made a couple bucks. Good article
Dividend Seeker profile picture
Thanks, yes I was buying last week. A good portion of my position was in too early, but buying on Friday really made up for it with today's move.
The market tends to make exaggerated moves in either direction. Fear causes overselling and greed overvaluation. I added last week and suspect we will probably have further periods of weakness as markets begin to recover. Markets never go straight up or straight down. In either case I will patiently continue to add in future weakness and as the market recovers.
Dividend Seeker profile picture
Great points, thanks for sharing your thoughts
Dividend Seeker profile picture
Nice to see the gains extending, its been a lot of back and forth today so far.
John R. Clark profile picture
Our host author advises us to "go against the grain" by buying shares in a bear market. Actually that runs right along the "grain," or standard wisdom to buy low and hold, sell high eventually.

Investing for the long term works when you stick with it, fat times or lean. I may not know much, but with investing a market correction is not a risk. It is a CERTAINTY that always comes sooner than expected.

Last November with no special foresight, I converted some equity and bond funds to money market shares for 2.5 years of living expenses combined with both our social securitys and a pension. This kept 90 per cent of our holdings in place for income and growth. When the market has risen again for a while I will replenish our cash reserves the same way, 6 to 12 months' worth in steps. You can't time this perfectly right but neither will you go far wrong by risking only a little at once.

Someone around here knocked me for holding so much cash, seeing how foolish that would have turned out from 2011 through last month. Fine, now let him laugh all he wants.

Best to all as we ride this out.
Dividend Seeker profile picture
Thanks for sharing your perspective!
swiftstroker profile picture
For the last several years, I've only bought stocks When they have made a new high, either working through their backing & filling or mild dips; when they are ready to make a new high, so am I, as they soar higher. Those days are gone. Now, as stocks work lower, I'll be looking to sell as they break through support. This decline is far from over.
Dividend Seeker profile picture
Everyone needs a strategy that works for them individually. Good luck!
Buying high and selling low, interesting strategy.
Dividend Seeker profile picture
Momentum trading is only for those who can withstand high amounts of volatility and exit trades quickly.
Cambridge STR profile picture
4 months to recover? Thanks CNBC for making me confident to go all in on stocks again.
Dividend Seeker profile picture
That is the average. How the next few weeks play out with regards to this virus will be critical
Cambridge STR profile picture
It's certainly better than the reports of the S&P taking 8 years to recover from the dotcom correction and the S&P taking 6 years to recover from the most recent correction. 4 months is a better metric, even if it's just an average.
Dividend Seeker profile picture
I completely agree. Long-term bear markets, or even corrections, are rare. But investors do need to be prepared nonetheless. Good luck to you!
MAA is one that you have written about. How do you like it at these levels?
Dividend Seeker profile picture
Good timing, I am finishing up a review on that one this morning. It has seen a sharp drop in the short-term, but is handily beating the market. I expect that to continue, and it has been one of my best holdings over the past year and a half
agreed. certain stocks are more reasonably priced. mo is pretty reasonable.
Cambridge STR profile picture
MO is on my wish list. Also, R. Yet, I am not buying currently.
Dividend Seeker profile picture
True, tobacco stocks have been one of the best values in the market for a while
i have been buying mo at 38.50-40 . i bought during fake vapocalypse, my relatives told me i will die from vaping , but i just took a puff in front of them.
vaping helped me quit smoking actually, and i know the value of juul. although they did overpay for it, but under 40 , mo is still cheap.
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