Start Buying Into This Selloff in Earnest

With the Dow down 500 points in early market trading, we suggest buying into today's carnage and picking up the pace into any additional, meaningful weakness. While every selloff is scary, and the problems seem insurmountable, we believe market action is going to track last year's selloffs and subsequent recoveries. When all was said and done, the market had healthy gains in 2014. As a result, it's easy to forget how we got there -- and most don't recall the scary periods along the way. In fact, there were five declines of 3.8%, or more, last year -- with the deepest, and scariest, occurring from September 18 to October 15: The S&P 500 was down 7.3% over that short stretch. During that period there was global fear over Ebola virus contagion coupled with major concerns about a slowing global economy -- led by fears of a Chinese slowdown. In the end, the concerns didn't pan out and the market recovered as quickly as it sold off, reaching its previous highs in 43 days and bouncing 7.14% off its lows in the first 15 days of the recovery, and 9.72% in the first month. Cleary, the current selloff is deeper and more worrisome, but we believe that for those with a 6-month-or-greater time horizon, stocks will be nicely higher, and that the rebound will be larger and quicker than most imagine. If you look at individual stocks and their valuations, there are a lot of great businesses that are selling at very attractive prices. Below is a table that looks at last year's decline and the subsequent bounce backs. What are noteworthy are the speed that the selloffs played out and the surprising speed of the recoveries. Rest assured that during each selloff there were myriad concerns, and many in the market believed that each was the beginning of a new bear market that ultimately did not pan out. Waiting for things to look better before stepping up and buying in was a very costly course of action. If you look at the table in some detail, what is clear is that as bleak as things were during each selloff, the recoveries were as sharp. And in each case a rebound was unanticipated at the time it began. Bear Periods of 2014 and Their Subsequent Rebound S&P 500 Bear Periods Jan 15 to Feb 3 Apr 2 to Apr 11 Jul 24 to Aug 7 Sep 18 to Oct 15 Dec 5 to Dec 16 Average # Days 19 9 14 27 11 16 Bear Return -5.72% -3.92% -3.85% -7.28% -4.89% -5.13% % Return after Bear Next 15 Days 5.86% 2.65% 4.25% 7.14% 4.44% 4.87% Next 1 Month 6.23% 3.60% 5.34% 9.72% 1.01% 5.18% Next 2 Months 8.89% 7.43% 1.68% 7.21% 6.30% 6.30% Next 3 Months 8.56% 8.91% 6.96% 6.99% 5.50% 7.38% Days till Prev. Peak 40 40 27 43 17 33.4 Bull Period Feb 3 to Apr 2 Apr 11 to Jul 24 Aug 7 to Sep 18 Oct 15 to Dec 5 Dec 16 to May 21 Average # Days 58 104 42 51 156 82.2 Bull Return 9.01% 10.07% 5.61% 11.77% 8.01% 8.89% Hopefully, this table will give those who were hoping to buy on the dips this year some confidence that, although it actually feels very uncomfortable while the selloff is occurring, it is likely to be a very profitable endeavor. We are fully aware of the market's overhangs, but we also believe that they will be overshadowed by a number of currently ignored positives: a generally ok global economy, recovering Europe, a healthy U.S. economy, ok corporate earnings, growing labor markets, recovering real-estate markets, low interest rates, robust merger activity, healthy levels of corporate activism and average valuations (about 16.8x 2015 earnings and 15.5x 2016 earnings). Although there is a strong likelihood that if you buy into this selloff you will feel stupid in a day, week or month, we also strongly believe that 6 months and a year from now you will be kicking yourself for not buying more. We believe the following list represents some great buys at current prices: ACE (ACE) Cisco Systems (CSCO) DuPont (DD) Devon Energy (DVN) Eaton (ETN) Gilead Sciences (GILD) Harley Davidson (HOG) JPMorgan Chase (JPM) Microsoft (MSFT) Schlumberger (SLB) Symantec (SYMC) TE Connectivity (TEL) Wells Fargo (WFC)

Start Buying Into This Selloff in Earnest

Although itis never comfortable buying into a selloff, it will look very smart in 6 months.

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