For new equity investors, I believe this inevitable market correction is likely a good time to invest in stocks. For existing equity owners, this could be a good time to rotate into stocks and funds that better suit their objectives.
- 99% of stocks in the S&P 500 Index went down on 9 March.1 The index saw its biggest one-day loss (-7.6%) since 2008.2
- This is the first time that virtually all stocks went down on a major down day.
- Even stocks that were beneficiaries of low energy prices and low interest rates were down, showing that sellers were not differentiating much between potential winners and losers.
- This is the first time with a large selloff where so much of the market was in indexed vehicles, which is why I speculate that all stocks were down together.
- The high correlation between all stocks can create opportunities for all investors.
- The yield on stocks compared to Treasury bonds reached a record high.3
Most active fund managers have the opportunity to pick both winning and losing stocks. Passive investing buys or sells everything across the board. The prominence of passive investing has changed the market dynamics and provides an opportunity for active investors.
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What Are the Risks?
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Diversification does not guarantee protect or protect against risk of loss.
1. Source: FactSet, Standard & Poor’s 500 companies’ returns on 9 March 2020. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not an indicator or a guarantee of future performance. Important data provider notices and terms available at www.franklintempletondatasources.com
2. Source: Bloomberg, S&P 500 Index as of 10 March 2020. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not an indicator or a guarantee of future performance. Important data provider notices and terms available at www.franklintempletondatasources.com.
3. The S&P 500 Index dividend yield exceeded the US 30-year Treasury yield for the first time in over 10 years—by 82 basis points (bps). The previous highest spread was 70 bps in December 2008. Indices are unmanaged and one cannot directly invest in an index. Past performance is not an indicator or guarantee of future performance. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. One basis point is equal to 0.01%.