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Is It Time to Buy Stocks Now?

By Daniel Sparks – Jul 27, 2020 at 6:41AM

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The market has already rebounded more than 40% from its bottom earlier this year. Is it too late to invest?

It's been a wild year for investors. After the S&P 500 peaked in February, the market index fell 34% in just over 30 days. Opportunistic investors who were buying stocks during this downturn, however, have been rewarded handsomely. The market index has rebounded more than 40% from the market bottom in March, recovering a large portion of the brutal losses stocks suffered earlier this year.

But what about investors who still have some money on the sidelines? Is now a good time to invest? Or is the opportunity to make money in the stock market now in the rearview mirror?

A chart showing a stock price moving higher

Image source: Getty Images.

Uncertainty abounds

While it's impossible to know where stocks will go in the near-term, one thing is clear: The economic environment remains uncertain. In fact, it could be argued that there's immense instability for businesses right now. Lockdowns and social retractions have significantly impaired commerce in many industries. In fact, according to recent findings by Yelp, more than half of the businesses that were closed temporarily after the COVID-19 outbreak started have now been marked as permanent closures. 

It's a bleak situation, to say the least. Consider these details from Yelp's study.

Even as total closures fall, permanent closures increase with 72,842 businesses permanently closed, out of the 132,580 total closed businesses, an increase of 15,742 permanent closures since June 15. This also means that the percentage of permanent to temporary business closures is rising, with permanent closures now accounting for 55% of all closed businesses since March 1, an increase of 14% from June when we reported 41% of closures as permanent. Overall, permanent closures have steadily increased since the peak of the pandemic with minor spikes in March, followed by May and June.

Meanwhile, negotiations over a second government-backed stimulus package to help businesses, schools, and citizens cope with these challenges has been delayed. With a backdrop like this, stocks may seem too risky for some investors.

Of course, it could also be said that low interest rates and a potential second stimulus package set the stage for a powerful bull market if things go right.

The spectrum of potential economic outcomes is enormous. Uncertainty seems to be the primary constant in these unprecedented times, and the outlook for stocks is similarly unclear.

Why you should buy stocks now

Does all of this mean that investors should avoid the stock market and keep their money in savings? Not at all.

Uncertainty isn't anything new for investors. It could be argued that it's always unclear how the stock market will fare over the short-term. Indeed, even famed investor Warren Buffett has said he "can't time stocks" and that he doesn't know anyone who can. There are simply too many unknown factors that can come into play to influence investor sentiment.

But here's what we do know. Over time, global gross domestic product (GDP) has steadily risen, albeit with occasional periods of contraction before resuming a sharp upward march. The same has been true for the U.S. stock market. For instance, over the last 100 years, the Dow Jones Industrial Average has risen nearly 11,000%, enduring a Great Depression, world wars, and recessions. In the last five years alone, the Dow has risen 50% -- and that includes a tumultuous 2020 in which the Dow is still down about 10% from highs earlier this year.

What does this mean for you and your money? As long as you have cash you're willing to keep invested for the long haul, there's a good chance that buying stocks today will lead to wealth creation over the next five to 10 years.

Warren Buffett

Warren Buffett. Image source: The Motley Fool.

Don't take my word for it. Lend an ear to Berkshire Hathaway (BRK.B 0.40%) (BRK.A 0.35%) chairman Warren Buffett, who has made a fortune in the stock market. During Berkshire's annual shareholder meeting, which took place as stocks were plummeting during the coronavirus market crash, Buffett said he still believes it is advantageous for investors to buy a "cross-section of America," or pieces of high-quality, publicly traded U.S. companies. "You are dealing with something fundamentally advantageous, in my view, in owning common stocks," the Oracle of Omaha explained. "I will bet on America the rest of my life, and I hope my successors at Berkshire do it."

None of this optimistic view for stocks means that investors won't face torrential downturns in the interim. Anything can happen to stocks tomorrow. Indeed, stocks can fall as much as 50% from time to time. But American business has proven resilient in the past -- and it will likely do so again.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
$478,675.55 (0.35%) $1,655.56
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
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