The perfect storm (which anyone reading the economic news could have foreseen) is responsible for the stock market crash in the S&P 500, Dow Jones Industrial Average, and Russell 2000 Small Cap Index. How low will the market go? And what should risk-averse investors do in the midst of the stock market chaos and volatility? If you want to see if you have the mettle of Warren Buffett, you can embrace the volatility and look for opportunity in chaos.
Why Is the Stock Market Crashing?
After years of unabated growth and double-digit annual gains, investors are reeling from the recent stock market crash. The S&P 500 is down almost eight percent since the beginning of the year and has taken out August’s lows; the Dow Jones Industrial Average is down more than eight percent and is closing in on August lows; and the Russell 2000 Small Cap Index is off an eye-watering 11.0% and at a two-plus-year low.
What’s behind the chaos and volatility?
Oil prices are down—way down. At $30.00 per barrel, oil is at its lowest level in 12 years. Oil prices were hovering near $100.00 a barrel from 2010 to 2014 on the heels of strong demand from China.
Perhaps not so coincidently, the U.S. overtook Saudi Arabia and Russia as the top oil and gas producer in 2015. Saudi Arabia—I mean OPEC—in a bid to maintain its strong hold (and maybe undermine U.S. interests), maintained and even increased its oil output, flooding the global markets. Now that sanctions against Iran have been lifted, we can expect more oil to saturate the market.
But oil is just the tip of the iceberg.
China, the world’s second-largest economy, is on the skids, the global economy remains bleak, the U.S. dollar is strong, and the Federal Reserve raised rates for the first time in a decade, signaling four additional quarter-point increases throughout 2016 while they were at it. Of course, geopolitical tensions in the Middle East aren’t helping matters any.
Dow Jones Makes 23,000% Gain
You can’t time the markets, but it’s important to keep in mind that the businesses always have cycled from stock market crashes, corrections, and depressions and rebounded to new highs, as is evidenced by the most recent rebound after the markets bottomed in 2009. Between March 2009 and the end of 2015, the S&P 500 was up roughly 210%. Over the same period of time, the Dow Jones climbed 170%.
It gets even more encouraging when you take a longer view at stock market gains and volatility. On January 2, 1900, the Dow Jones closed at around 68; today, even after the worst start to the year ever, it’s near 16,000. This represents a long-term gain of more than 23,000%. To get to this spot, the Dow Jones had to cycle through two world wars, a depression, regional wars, umpteen recessions, terrorist attacks, geopolitical tension, and domestic issues.
I know, you’re not going to be around to enjoy 116 years of personal stock market gains, but you can take solace knowing the markets always rebound and always reach new highs.
So what can investors do when everyone is running for the exits, besides not selling excellent stocks being unjustly hurt by irrational investors? Look for opportunity in the chaos and volatility, which includes great companies unjustly hammered by investors.
Investment Opportunity in Stock Market Volatility
There is still a lot of opportunity out there for investors. One of the best places to start is to look for big companies that have a really long history of raising their annual dividends. That means raising it when times are good and when times are bad.
Some examples of the best companies for rewarding investors with consistent, annual dividend growth and long-term gains include Altria Group Inc (NYSE:MO) with 46 consecutive years of increases; The Coca Cola Co (NYSE:KO) at 53 years; 3M Co (NYSE:MMM) at 57 years; and lesser-known companies like American States Water Co (NYSE:AWR) at 61 years.
For those investors who like to keep an eye on their investments on a regular basis, you could look at exchange-traded funds (ETFs) that short the S&P 500, Dow Jones Industrial Average, and Russell 2000 Small Cap Index.
The ProShares Short Dow30 (ETF) (NYSEArca:DOG) didn’t do well when the Dow Jones was at record-levels, but it’s been one of the few investments that have been soaring as of late, up seven percent year-to-date.
Meanwhile, the ProShares Short S&P500 (NYSEArca:SH) ETF is up 6.5% since the beginning of the year and the ProShares Short Russell2000 (ETF) (NYSEArca:RWM) is up 12.0%.
It is important to note that the above is not a recommendation to buy any of the listed stocks and ETFs; rather, these lists are meant as examples of the kinds of stocks and ETFs investors can watch to profit during times of stock market chaos and volatility.