What's next? Probably every investor is asking this question. Some think the coronavirus bear market has already ended, with a strong new bull market ready to roar (maybe "moo" is the more appropriate term). Others think we still haven't seen the worst yet and that the market's rebound over the last week or so will be short lived.
The truth is that no one knows for sure what's going to happen in the stock market. My best guess is that it probably will go lower. But even if it does, I'm not going to change my investing strategy. I don't think you should, either. Here's why the smartest approach is to keep investing regardless of what happens next with the market.
Why the slump is likely to continue
I wrote that the coronavirus bear market is likely to get worse before it gets better just a few days before the stock market rebounded nicely. Despite the bounce, I still think the premises behind my prediction are still valid -- although I'd be happy if it turns out that I was flat-out wrong.
There's an old saying that "bull markets climb a wall of worry." That might be true, but I suspect the reasons for worry over the near term will present a hill too steep to climb.
Most Americans realize that the number of COVID-19 cases hasn't peaked yet. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, recently said to be prepared for 100,000 U.S. deaths. If the death toll is that great or even higher, my hunch is that it will pop the balloon of any irrational exuberance among investors that might exist.
During the last week of March, 6.6 million Americans filed for unemployment -- an all-time high. Economists are also warning that the jobless numbers will continue to soar.
And earnings season hasn't fully arrived yet. My hunch is that we're about to see a wave of companies miss first-quarter estimates and either withdraw or slash their full-year guidance.
Could stocks rise in such a dismal environment? Maybe. But I'd say the chances are much greater that the market will decline over the next few weeks and months.
Some might think that the best strategy is to avoid investing in stocks until it appears that the worst is over. I disagree. My plan is to invest anyway, whether the market sinks or soars. There are three main reasons I'm taking this approach.
First, my chances of timing the bottom of the stock market are slim to none. So are yours. The market nearly always rebounds before the overall economy does. We can't simply wait until unemployment begins to fall again or companies' earnings results improve.
Second, some of the stocks that I like will probably swim against the current and rise even if the market continues to fall. That's exactly what's happened so far this year with several of the stocks I own, notably including Gilead Sciences and Teladoc Health.
Third, and more importantly, I have a long-term investing horizon. When I buy a stock, I fully expect that it will have up-and-down swings along the way. I only invest in the stocks of companies that I think have great growth prospects over the next decade and beyond. While I'm not sure how long the COVID-19 outbreak will affect the stock market, I'm confident that the crisis is only a temporary one.
My investing approach
So am I embarking on a buying frenzy, scooping up shares left and right? No. My investing approach during this unusual period is to buy stocks incrementally over the next two to four months.
I've researched a long list of stocks, evaluating each stock on multiple criteria including growth prospects, business moat, financial strength, dividends, and management teams. My plan is to buy the top stocks on my list in stages, spending one-third of my allotted cash for the stock on the first purchase, another third a few weeks later, and the final third a few weeks after that. I won't buy at the bottom with this approach, but I still expect to buy high-quality stocks at attractive prices along the way.
My list of potential stocks to buy is too long to include in this discussion. However, I'll point out a couple of them to highlight what I'm looking for.
Brookfield Infrastructure Partners (BIP -3.11%) checks off all of my boxes. The company owns a wide array of infrastructure assets, including cell towers, data centers, electricity transmission systems, natural gas pipelines, ports, railroads, and toll roads -- the kinds of assets that have high barriers to entry. Brookfield calls itself a "grow-tility" because it offers the security of a utility stock with strong growth prospects through its strategy of selling off lower-performing assets and reinvesting in assets with better growth opportunities.
The company's management team has a great track record. And they're fiscally conservative, keeping the company from taking on too much debt. I really like Brookfield Infrastructure's dividend yield of over 6% and think the company is in a great position to keep the dividends flowing in the future.
Guardant Health (GH -1.75%) is a very different example. The company is a pioneer in developing liquid biopsies, blood tests that can detect cancer by identifying fragments of DNA that break off from tumor cells. Guardant Health has a nice head start in the liquid biopsy arena, with two products already on the market for which sales are soaring.
To be sure, Guardant Health is riskier than Brookfield Infrastructure. It isn't profitable yet. However, its growth prospects are absolutely ginormous. The company should have an addressable market of over $50 billion, and it's capturing only a sliver of that market right now.
I already own both of these stocks and plan to add to my positions incrementally in the near future. Like the overall stock market, Brookfield Infrastructure, Guardant Health, and the other stocks on my list might decline over the next few months. But I'm going to buy them anyway. And I think they'll be winners for me over the long run.