Another Wall Street record has bent as yesterday's steep decline briefly sent the Dow Industrials down 13%, more than what investors had to swallow in the legendary Black Monday plunge of 1929. The good news is that the market establishment has learned a lot in the intervening nine decades.
Never forget that the Dow dropped nearly 22.5% on another Black Monday, this time in 1987. That day was truly gruesome, wiping out close to a quarter of all market capital in a matter of hours . . . the equivalent of yesterday and last Thursday combined. It's impossible to experience another drop like that. The market will shut down at 20% and everyone will simply go home to cool off.
Admittedly, the difference between 20% and 23% is cold comfort, especially when a big down day is only part of a more extensive slide like what we're enduring now. But it's still useful to reflect on how far the market has come after that 1987 catastrophe and how fast the damage was repaired. Back then the S&P 500 topped out a little above 300. Although it took close to two years to recover that level, after that the index resumed its long-term bull trajectory, gaining close to 9% a year through the intervening decades.
That's not a bad return considering it includes the dot-com crash, the 911 market disruptions, the 2008 crash and what we're seeing now. Those substantial declines as well as all the little ones in between came and went. The market healed and investors booked roughly a 9% return. We have no reason to suspect that track record will change now. If anything, in the truly long haul the weight of history suggests that future gains will ultimately track a few percentage points higher as performance reverts to the statistical mean.
Of course you might not be thinking decades down the road. If your horizon is significantly tighter, it can be a real morale test to watch your stocks drop 30-50% or even more in a matter of weeks, then hear that the market generally earns back 9% of that loss in a typical 12-month period. The good news is that the recovery is generally accelerated when the drop itself is steep. The 1987 crash, for example, was over in a few years and then all investors (even those who bought at the very top) were whole again and making money. We saw this play out most recently in 2018, when the S&P 500 dropped 20% in three months and then picked up its record-breaking journey another 120 days after hitting bottom.
With the Federal Reserve on watch, it's clear that monetary authorities will do everything in their power to ensure that the recovery this time around will be as fast and furious as possible. They've learned from 2008 and will be extremely careful to avoid repeating those mistakes. Practically infinite liquidity is now available to prevent a bank crash, and at zero percent interest, the Fed can keep pumping money for the foreseeable future. Dormant inflation is a gift here giving the central bankers more leeway than usual. We hope it lasts.
However, if the Fed falters, it could take 6-8 years before the market as a whole (and our stocks) recovers its recent peak and then gets back to work beyond that point. That's the real morale test. If that's too long for you to wait, we suggest that it's time to start rotating out of growth-oriented stocks into the deep dividend recommendations on our list.
We don't see any of our battered REITs collapsing, especially if the government starts bailing out Hotel and Airline stocks. In that scenario, locking in these yields can support a lower-risk posture while we wait for the market mood to recover. The stocks may decline, but you aren't looking to sell them here. All you're looking for is the current income to pour back into more stock, reducing your overall cost basis in the process.
Two or three years booking what are now 8% or higher yields will match the market's long-term performance no matter where the stocks go over that period. If that's your time horizon and your risk tolerance, we don't suggest making a full pivot now. Lighten your growth-focused positions (preferably locking in profit in the process) and add to your existing High Yield holdings. That way, you aren't liquidating everything when the market is at its weakest. Plenty of other investors are doing that now, and there's zero reason to do that unless external pressure forces you to do it.
We suspect the world will look a lot brighter two or three years from now. If not, odds are good nobody will be retiring then anyway. With that in mind, we have relaxed our Sell Prices for the duration. They're still in place for your guidance. If you're nervous seeing a position drop below the Sell Price, that's your nudge to let go. Maybe you were confident with the stock earlier but your conviction has cracked now. That's all right. If, on the other hand, you bought the stock at this level (or higher) in the past, what has changed to lower your horizons? If there's no compelling answer to that question, there's no logical reason to give up on the stock.