After the worst first half since 1970, stock market investors may be struggling with what to do now. The S&P 500 lost 20.6% in the first six months of 2022, nearly the same as the 21% lost during the first half of 1970. Rather than panic, however, investors can use that to their advantage.
What can happen next? Well, the last half of 1970 saw the market gain 26.7%. While no two time periods are exactly alike, the lessons from past market downturns are as valid as ever. Here's how to take advantage of the current market to boost long-term wealth creation.
1. Look for low prices offering value
One of the benefits of this type of downturn is that stocks of well-known, successful businesses are on sale. Investors don't need to get fancy when searching for opportunities. Consider what you already know works. Take Home Depot (HD -1.77%) as an example. Based on its price-to-earnings (P/E) ratio, Home Depot's stock is trading at a valuation it has only hit once in the past 10 years. This is a company that has doubled its annual revenue over that time.
HD PE Ratio data by YCharts
And Home Depot isn't the only solid company trading at a discount. Apple (AAPL 1.27%) reported record revenue for its fiscal second quarter (ended March 26). Its services revenue reached an all-time high. Sales grew 9% year over year, and the company has more than $190 billion in cash. Apple chooses to hold some debt, but it's manageable should things worsen. And with the stock down 40% over the past 18 months, it is also trading at a multi-year low P/E.
Another cash-rich company with growing sales is GPS-device maker Garmin (GRMN 0.20%). It expects sales to grow another 10% this year and holds $3.2 billion in cash and marketable securities with no debt. Garmin shares are down nearly 30% year to date.
These flush companies are solid holdings in a struggling economy. Both Apple and Garmin also use that cash to regularly increase dividends paid to shareholders, providing real income through good times and bad.
2. Watch what Buffett's buying
It makes sense to take a cue from one of the best investors of all time. Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) spent more than $51 billion to repurchase about 9% of its own shares in 2020 and 2021. Those share repurchases slowed in the first quarter of 2022 when the share price was rising. Warren Buffett said he tends to increase share buybacks when Berkshire's share price drops below 1.2 times book value.
As Berkshire's stock increased earlier in 2022, its price-to-book value approached 1.6. That helps explain why the company only repurchased $3.2 billion in shares during the first quarter. Instead, Buffett found investments he considered to be better values. But the stock is now back close to Buffett's 1.2 times book value threshold.
With stakes in businesses that operate in manufacturing, energy, and insurance, buying Berkshire stock provides investors with immediate diversification. It also wouldn't be surprising to see that Buffett has increased the pace of repurchases from the first quarter when the company reports its second-quarter results in the beginning of August.
Win in a losing market
The market has been in a historically sharp downturn in 2022. Besides being the worst first half in more than 50 years, it was the fourth-worst of all time behind 1932, 1962, and 1970. There's no way to know if the market will bounce back in 2022 like it did in the second half of 1970 but it is sure to recover in time.
No investor can call the exact bottom, but these bargain stocks all make strong investments. All are high-quality, proven companies that are easy to understand. With many of them trading at multi-year lows, investors are getting a good opportunity right now to juice their long-term returns.
