COVID-19 has not only meant the end of the bull market for stocks, but it may have an impact on the stock market for years to come. You may want to take advantage of this buying opportunity as stocks are much cheaper than they have been in several years right now. Nonetheless, you should enter the market carefully, buying the right stocks and a little at a time.
The Dow Jones Industrial Average
People have long associated “the Dow” with the entire market. In other words, it is the shorthand that people use to refer to the stock market. The Dow Jones Industrial Average is actually an index of 30 of the largest companies in the United States. The index is weighted by market capitalization of the component companies. The Dow represents over $6 trillion of market capitalization of its companies.
The Effect of COVID-19
The Dow has dropped roughly a third since the start of the coronavirus crisis. The economy has largely shut down and nearly ten million people have filed claims for unemployment.
As a result, nearly all companies are seeing their earnings and revenues slashed during this time. One of the most important elements of share price is the future earnings of a company and there is simply no visibility into this metric at this point. Between the dropping earnings and the uncertainty, stock prices are lower and may fall even further.
The Dow Is Dropping Sharply
In case you are wondering about the Dow Jones Industrial Average today, all stocks in the index have been dropping markedly in recent weeks. While there is definitely a reason for all of these stocks going on sale, you should look for high-quality companies whose business will recover and that make a necessary product.
One of the particular metrics that you should look for is cash on the balance sheet. A company that has lots of it will be able to weather an economic storm. In addition, you should also pay close attention to analysts’ earnings forecasts for these stocks. Every company will be posting lower earnings, but the key is which ones will see earnings recovery in the second half of 2020 and into next year. Make sure to look for companies that pay a dividend and have the earnings to maintain that payment.
Should You Invest Today?
The market is filled with stocks that are good values for the long-term investor. Buying stocks as an investment is not a bad idea given how cheap they have become. However, you should be looking to time or trade the market.
You may find that the Dow Jones Industrial Average has lowered to the downside because the effects of the current economic situation are not fully known. It is not apparent if the stock market will recover quickly as the nation resumes normal economic activity or if there will continue to be an overhang as the health officials struggle to contain the virus.
Thus, investing a little bit of your money at a time is the best approach to buying stocks in this market. Be prepared to buy a little more each time that the market falls because you can get an even better value on the shares that you buy. In other words, if you have money to invest, do not use it all at once but scale into your stocks at progressively lower prices each time.
This is a dangerous and scary time for many investors. However, by prudently buying when you can, you will be poised to profit when the stock market rebounds in the future.