Markets Go Up in An Escalator And Down In An Elevator

The saying “markets go up in an escalator and down in an elevator” is perhaps one of my favourite finance idioms, and is one which is particularly prescient today.

Many young investors have not been through an economic calamity like this, and therefore do not have a true idea of how sentiment shifts affect traders and investors alike to the degree they do in such scenarios. The thought that 10 years of 7% gains can be wiped out by one single 50% drop should not be overlooked - we’ve now entered another “lost decade” on the Toronto Stock Exchange.

The degree to which markets will continue dropping is the real question investors like myself are asking right now. I’ve been completely out of the stock market since early 2018, and while I did miss a heck of a rally these past couple years, cash in the bank appears to be worth more than gold right now as I’m able to buy stocks at 2008 levels, rather than 2018 levels.

The way I think about the stock market right now is that we’re roughly priced around two-times book value on the S&P 500.

To put that in perspective, we were at around three-times book at the end of February. In 2008/2009, we bottomed at one-time book, implying a worst case scenario of another 50% drop from here.

I’m still on the sidelines, but am ultra conservative. So for investors willing to jump in, your upside may be greater than mine five years from now. But depending on the company, you may be holding a “zero” if things get really bad, which is what I’m worried about.

Invest wisely, my friends.