How to Profit From This Pandemic Correction

The Dividend SenseiThe Dividend SenseiOctober 31, 2020
How to Profit From This Pandemic Correction

In part one of this series, I explained why Morgan Stanely, one of the 16 most accurate economic teams in the world, expects this pandemic to trigger a full-blown stock market correction. What’s more, JPMorgan, also part of the blue-chip economist consensus, thinks a bear market is possible if rising viral cases this winter triggers a double-dip recession.

With painful memories of the March crash still fresh in all our minds, the prospects for a sharp decline in the market is something that understandably has many investors worried. Fortunately, there are three ways you can not just avoid costly losses in these troubled and uncertain times but actually profit from what’s likely to be a great 2021 for the S&P 500 and a face-ripping rally for certain undervalued, pandemic effected blue-chips.

Remember to Always Keep Market Declines in Perspective

(Source: Imgflip)

Morgan Stanley’s pandemic correction prediction might sound scary. After all, if they are right then stocks will end up falling 12% from record highs.

(Source: Guggenheim Partners, Ned Davis Research)

But guess what? Of the almost three dozen corrections we’ve had since 1945 the average peak decline has been 14%, and it took four months for stocks to bottom at those levels. Historically, within four months of correction lows, stocks are back to record highs.

Since 1980 the average peak intra-year decline has been 13.8%, basically the historical correction average. That includes back in 1987 when the S&P 500 fell 20% in a single day, 30% within a few weeks, and still managed to finish up 2% that year.

(Source: Michael Batnick)

Since 2009 we’ve had dozens of market freakouts, all based on headlines that investors assumed meant that they needed to “do something!”. Guess what?

As long as the US economy doesn’t implode owning stocks is as close to a guaranteed way of compounding income and wealth as you’ll find in this world.

While it’s always prudent to listen to the most reputable experts, it’s also important to remember that Wall Street only speaks three languages, none of which are absolute certainty. The three languages of Wall Street are

  1. probability
  2. margin of safety
  3. risk management

Always Invest Based On What’s Most Likely To Happen, Not Worst-Case Scenarios

Could the second wave of the pandemic trigger a double-dip recession? Absolutely. Is it likely to?

(Source: Jeff Miller)

According to a recent survey of US CEOs, just 23% consider a double-dip recession likely. Among economists? The risks of a second economic downturn are estimated at 20% to 25% as well.

                       Blue-Chip Economist Consensus 

(Source: MarketWatch)

Among the 16 most accurate economists out of 45 tracked by MarketWatch, the blue-chip consensus, neither Q4 2020, Q1 2021, or 2021 overall, is expected to see negative economic growth. In fact, next year the most accurate economists on earth expect the strongest economic growth in 20 years. That’s expected to result from $1 to $2 trillion in stimulus, which may rise as high as $3 trillion according to Moody’s depending on the outcome of the election.

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