While stock market crashes and corrections are unpleasant, history has shown that every time, they’re eventually followed by a surging recovery. That’s because investors often make the biggest mistakes when panicking. And once the discounts become too absurd, people start to wise up taking advantage of the buying opportunity to boost their wealth as confidence returns.
2024’s no different. We’ve already seen what might be the start of a recovery take place. Since October, FTSE 250 stocks, on average, are up by double digits. And even underappreciated businesses inside the FTSE 100 have started to follow suit.
Capitalising on bargains is a proven strategy to build a bigger portfolio. But new deals emerge every day, so what makes 2024 so special? Let’s break it down.
Recoveries are rare
The emotional impact of experiencing a bear market is far more prominent than the trills of a bull market. As such, crashes and severe corrections tend to stay vivid in memory. So much so that it’s easy to forget these events are pretty rare.
Ignoring the three-month blip that was the 2020 Covid-Crash, the 2022 stock market correction occurred 14 years after the Global Financial Crisis in 2008. Eight years before that, it was the dotcom bubble. And 13 years before that, it was Black Monday in 1987.
In other words, in the last 50 years or so, there’s only been a grand total of five major market downturns. And that means only five opportunities to capitalise on the subsequent recoveries, which later proved to be some of the best times to buy stocks.
There will be another major downturn at some point. And there’s no real way of knowing for certain when that unpleasant event will occur. But using history as an indicator would suggest it may be another decade before investors can capitalise on a recovery. That’s why I believe investors need to act fast before quality stocks complete their comebacks.
Don’t rush to a decision
Time may be of the essence to snap up value stocks this year. However, that doesn’t mean investors should scramble to buy without performing the necessary due diligence. Even during a recovery when many shares enjoy positive momentum, it’s still possible to end up owning duds.
While the stock market as a whole has a perfect track record of recovery, it doesn’t mean every stock is destined to skyrocket. In other words, a stock might be cheap for a good reason. Therefore, investors need to spend time as well as capital digging into the details of each prospective business.
It’s not just the financials that need to be analysed, but operations as well. For example, a company with factories in politically unstable regions has a far greater chance of being disrupted than one that doesn’t.
A perfect example of this a few years ago was EPAM Systems. The tech stock darling stood out by having significantly higher underlying profit margins compared to its peers.
Management’s trick was to hire its talent out of Eastern Europe, where software engineers demand a far lower salary. And that included over 15,000 workers from Ukraine – a region suffering from rising tensions with Russia that ultimately culminated in a tragic invasion. That wiped out more than 50% of EPAM’s market-cap in the space of a few days.
