The Upside of a Down Market


Few investors were sad to see 2018 wind down, with its manic swings and its knee-jerk reactions. As the New Year approached, the markets saw irrationality replaced with no-less-sensible volatility, and some indices (such as the Russell 2000) slid into bear market territory and others (such as the S&P 500 and Dow) dropped down to severe correction levels.

But even as every new trading day brought hope of a rebound, some investors said goodbye to equities. Investors pulled $46.2 billion from U.S. equity mutual funds and exchange-traded funds between December 5 and December 12, 2018, which is the biggest one-week outflow on record, according to Lipper.

It’s hard to say where these investors are moving their cash, with neither bonds nor interest rates offering compelling opportunities. As stock enthusiasts, we don’t try to understand where the market is going in 2019, instead keeping our focus on what comes after the bear market or correction and after the recession. In the long-term, the markets and economy are always bullish and will certainly be higher than they are today.

In preparing the January 2019 issue of the SmallCap Informer, the market’s moves since the end of November were certainly apparent. Eight or ten stocks breached their projected low prices and required resetting. Those previous lows were probably best characterized as “bull market low prices,” but since none of those companies exhibited any significant fundamental problems that would warrant such a sell-off, the price declines are almost certainly a product of emotional or panicky selling.

In other cases, stocks on our coverage list see prices that declined from levels that might be called “exuberant valuations” to prices that represent logically-deduced valuations. In other words, there are small-cap stock buys abounding for those who can focus on the year 2024, even if we see some further slides in the market. It’s the one big upside of a down market—stocks are on sale heading into 2019, and this looks like a great time to purchase great companies at great prices.


Reprinted from the January 2019 issue of the SmallCap Informer.