March has undoubtedly been one of the most volatile months investors have seen on the markets, perhaps ever. The Dow Jones went from more than 27,000 points early in the month to a low of barely 18,000 points weeks later. It's been a very sharp decline for the Dow, which is normally fairly stable. The last time there was a big drop in the markets was in the fall of 2018. Back then, the Dow dropped below 22,000 points from a high of more than 26,000 points a month earlier.
The S&P 500 crashed more than 15% in just the past month; in 2018 even with the large sell-off toward the end of the year, it was down just 7% for the whole year. What's happening in the markets now is much more severe than 2018 and anything investors have seen since the financial crisis. But the big question many investors are likely asking is whether the markets have reached a bottom and if now is a good time to buy, or should they wait for stocks to slide even further down? Let's take a closer look to see which approach investors are better off with today.
Why the markets may continue falling
The coronavirus pandemic is to blame for the recent panic not just in grocery store aisles but in the stock market as well. If people stay indoors, it doesn't do businesses a lot of good if they're not able to operate and there are no customers to buy their products and services.
While it may seem like things are difficult now, this crisis may not be ending anytime soon. Regardless of how optimistic the U.S. president sounds about containing COVID-19, he's preparing for a long battle that may take longer than 18 months.
Image source: Getty Images.
Although the outbreak of COVID-19 started months earlier, the World Health Organization (WHO) didn't declare it a pandemic until March 11. By then, the Dow had fallen below 24,000 points as investors were already well aware of the risks that COVID-19 posed to businesses. If the pandemic does last for another year, things could get a whole lot worse.
As the death toll continues climbing and more cities around the world go into lockdown, there's a very strong likelihood that the markets may turn even more bearish. Looking back to the financial crisis that occurred more than a decade ago, the Dow went from more than 14,000 points to less than 7,000 points. It lost more than half of its value in what was an epic and catastrophic crash in the markets. Before this latest sell-off, the Dow was close to 30,000 points; if it suffers a similar loss of more than 50% from its high, then there's clearly a lot more room for it to fall.
Why things may improve
As bad as the outlook may seem, investors need to remember the markets are all about expectations. Favorable news regarding the containment of COVID-19 or even a possible treatment for it could be all that's needed to send the markets into a recovery. The pandemic doesn't need to be completely stopped for stocks to recover. Investors only need to have the perception that the worst is over, or that there's at least some light at the end of the tunnel.
One company that can be central to that light is Gilead Sciences (GILD -0.50%). Along with other healthcare companies, it's working to find possible treatment options for COVID-19. Gilead's Ebola drug remdesivir is one that many people and the WHO are optimistic about. In February, Bruce Aylward who is the assistant director-general at the WHO said, "There is only one drug right now that we think may have real efficacy and that's remdesivir."
With human trials already underway and Gilead expecting to announce results as early as April, the light for the stock market may come sooner rather than later. If there's a treatment that's able to prevent people from having to go to hospitals, then that can have an immediate impact on the pandemic. Even if Gilead's drug is unsuccessful, there are other drugs that may show potential in treating COVID-19.
What should investors do?
The impact of COVID-19 may be long-lasting, especially if health officials aren't able to find an effective treatment soon. But the biggest challenge for investors today is that amid the economic uncertainty, it may be difficult to invest in a stock and leave the money in there for potentially one or two years and wait for the markets to recover -- should a recovery take that long.
History repeats itself, and one thing it's taught investors is that the stock market will recover from each downturn and come out stronger. Buying shares of good value stocks today could reap significant rewards for investors later on. But waiting for more of a decline may result in a missed opportunity. Investors may not get an opportunity for a long time to buy stocks at these levels, and if you can afford to put aside money that you won't need for at least three years, then now may be an optimal time to buy and hold stocks.
