‘In seven of the last 10 bear markets, it has been better to be late than early,’ said Dan Suzuki of Richard Bernstein.
With the S&P 500 down 16% year to date, you might think stocks are a bargain and now is the time to buy.
Not so fast, says Dan Suzuki, deputy chief investment officer at money manager Richard Bernstein Associates.
“Many investors insist on buying early so that they can be there at the bottom,” he wrote in a commentary. “Yet history suggests that it’s better to be late than early.”
He looked at returns for the 18-month period encompassing the six months before and the 12 months after each market bottom.
He compared the returns of an investor who owned 100% stocks for the entire period with one who held 100% cash until six months after the market bottom, then shifted to 100% stocks.
Better Late Than Early
“In seven of the last 10 bear markets, it has been better to be late than early,” Suzuki said. In other words, the latter investors cited above did better than the former investors 70% of the time.
“Not only does this [buying late] tend to improve returns while drastically reducing downside potential, but this approach also gives one more time to assess incoming fundamental data,” Suzuki said. “Because if it’s not based on fundamentals, it’s just guessing.”
The three times during the past 70 years when it was better to buy early were in 1982, 1990 and 2020. In each of those instances, the Fed already had begun cutting interest rates, Suzuki said.
Contrast that to the present, he said. “Given the high likelihood that the Fed will continue to tighten into already slowing earnings growth, it seems premature to be significantly increasing equity exposure today.”
Looking at stock allocation, “rather than rotating portfolios away from bubble assets, investors tend to view the initial price declines as attractive opportunities to buy secular growth at huge discounts,” Suzuki said.
Former Winners Don’t Rebound Quickly
“Yet the history of bubbles suggests that they [the leaders of the rally] don’t return to being great investments after just six months of selling off.”
In the technology stock crash of 2000-2002, the tech-heavy Nasdaq 100 Index had 16 bear market rallies exceeding 10% during its 83% decline, with three of those rallies greater than 30%, Suzuki said..
When the market rebounds, there will be new areas of leadership, rather than the previous stalwarts, which were U.S. large-cap growth stocks, technology stocks and bonds, Suzuki said.
He is looking at value investments, including international stocks, small-cap stocks, and financial stocks.
“At this point in the cycle, it makes sense to focus on high-quality companies with stable cash flows and strong balance sheets, while avoiding bubble assets such as technology stocks and crypto,” Suzuki said.
There’s no guarantee that Suzuki is right. But historical numbers are in his favor. So it might make sense to tread cautiously before diving into stocks.
