When Is the Buying Opportunity

  • With global markets consolidating to the downside, is now the time to start pouncing on deals?
  • When equity markets crash by 30% or more, when is the buying opportunity? Let’s look at history. I also look at the stock market performance during three prior pandemics (1918, 1957–1958, ad 1968) for guidance.
  • Based on historical lessons (and a comparison to this situation and a prospective recession in Q2), there is more downside in equities near term (don’t rush!) but I expect a bottom to begin forming in the next one to two months.
  1. This isn’t a repeat of the Great Depression. That event was caused in part by the Federal Reserve not preventing the sharp drop in the money supply that took place during the period 1929–1933, in part by the Smoot-Hawley tariff in 1932, and in part by a series of escalating tax increases (Herbert Hoover raised tax rates from 25 percent to a maximum of 63 percent, and Franklin Roosevelt boosted them to 79 percent later in the decade). We will have a much more constructive set of responses from the government this time around.
  2. This is also different from the events of 2000 (probably). The run-up from 1995 to 2000 saw a quintupling of the stock market, and the market advance was very uneven … in 1999 for instance, the S&P 500 rose 20% (and the NASDAQ 100 rose by 86%) but more stocks fell than rose. The Fed was in an aggressive tightening mode in early 2000. Also, the events of 9/11 hit just as we were in the midst of the recession. This time around, the real economy is starting off on sounder footing. At the outset of 2000, the PE ratio on the S&P 500 was between 29 and 32 times trailing earnings, about 50% higher than it was at the market’s peak in February 2020. (As of March 24th, 2020, the S&P’s PE ratio on trailing earning is about 18x).
  3. Socially, we are not going to undergo a severe curtailment of individual freedoms, and a continuation of these conditions approximating martial law, forever. There will likely be more social distancing, more pain, more isolation over the next few months. The world has had worse things to deal with and come out stronger — this time will be no different.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Aman Verjee

Aman Verjee

Former C-suite at PayPal, Sonos, eBay. Now general partner & founder at Practical VC, a secondary venture capital fund.