What to Expect During a Bear Market

How are you finding bargains and protecting your portfolio in this Bear Market? According to Investopedia, a Bear Market happens when,

“… a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.”

In other words, investing during a Bear Market can be challenging.

What to Expect During a Bear Market

We’re in a Bear Market.

Stock and bond prices have continued to stay in their bear markets.  Rising rates, inflation, concerns that the Fed will push the economy into recession and the war in Ukraine continue to drag on prices and sentiment. 

The Federal Reserve last week raised the short-term funds’ rate by 50 bps.  Initially, the Dow Jones Industrials rallied almost 1,000 points, thinking that the Fed will not throw the economy into recession.  The following day, however, stocks sank more than they popped as the concern returned to the Fed’s move not being tough enough on inflation. 

That’s a bear market.  No news is good news.  Rallies don’t last.  Volatility is higher than normal.  It seems it will take a while for all of the investors’ concerns to be priced into the market. 

There does not seem to be a resolution to the Ukraine situation anywhere on the horizon. COVID has shut down China so supply chains continue to be stressed.  Consumers seem to have money and want to spend it. 

There seems to be no way out but for the Fed to dramatically slow the economy and perhaps cause a recession. 

Identifying a Market with Positive Momentum

We can’t even begin to think the “coast is clear” until the market can trade above its 200-day moving average, a widely regarded technical measure for a market with positive momentum. 

The S&P500 currently sits at 4,123.  The 200-day moving average comes in around 4,447.  We can’t even talk about a bull market until we make a new high which would be approx. 4,800. 

Having said this, when there seems to be no way out and sentiment is so negative, we may be well along to finding a bottom.

Still Good News on the Earnings Front

On the earnings front, there is still good news.  According to FactSet, with almost 90% of the S&P500 reporting, about 80% of companies reported profits that exceeded expectations.

Profits are an important factor in stock prices and can perhaps lessen the negative aforementioned issues.

Stock prices have fallen steadily and now the forward price/earnings ratio for the S&P500 is 17.6.  This is the first time this valuation indicator is below 18 since April 2020.  Again this indicates markets are steadily discounting bad news and trying to find a bottom.

The Purpose of Bear Markets

Bear markets are uncomfortable to outright painful.  However, they do serve a purpose – to ring out excesses and force investors to more prudently allocate their capital.

We have not been in relatively  “normal” times, economically speaking since the 2008 Financial Crisis, when Western, capitalist governments were deadlocked and, in my opinion, too austerity-focused. They left recovery policies up to the Central Banks. This gave the global economy weird outcomes such as extremely low and even negative interest rates.  Low rates and easy money led to speculative behavior in all sorts of asset classes.

More recently, we saw this in SPACs, “e-commerce and disruptor stocks”, and housing. 

The response to COVID was a bit different. Governments actually used fiscal policy to get money into the economy. Now there was both monetary and fiscal stimulus. Add that to the supply shocks of COVID shutdowns and a war in Ukraine and we now have inflation. 

The Federal Reserve is now reversing its easy money posture with a reduction in its balance sheet and lifting short-term rates.

Interest rates are the cost of money.  With a higher cost, investors may be less likely to engage in rampant speculation and businesses should be more responsible in the projects they undertake, improving their capital allocations. 

Fewer Bonds with Negative Interest Rates

Some of the weirdness is already disappearing.

According to a Bloomberg Index, there are about 100 bonds globally that still carry a negative interest rate. This is down from approximately 4,500 a year ago.

Rationalization of the COVID Stocks

“The COVID stocks” boom is a more recent example. Investors extrapolated that the rapid revenue growth companies saw due to the pandemic in e-commerce, home exercise, etc. would last forever. It was unrealistic and many of these stocks are now down 50% to 90%.

Normal Booms and Busts to the Business Cycle

Transitions to “normalcy” historically happen as part of the business cycle, with long boom times followed by a bust. Each time it is a bit different with different players and different excesses that ultimately get rung out. 

When the markets are in bear mode, investors and advisors need to act like the winemakers in Bordeaux.  

I like to follow Jancis Robinson, the wine writer for the Financial Times. Jancis recently wrote about the upcoming 2021 Bordeaux vintage. Her article was especially informative in that she described the trials it takes to make good wine in a tough year. With too much rain, too cool temperatures, untimely harvests, and mildew, the winemakers were challenged. It’s relatively easy to make a good wine in a good year. It takes a lot of effort to create a good wine in a bad year. The reds depended primarily on the skill of the winemaker who generally salvaged them into a good vintage. The whites oddly benefited from the cooler weather and should be a very good vintage.

Just as it’s easy to make good wine when conditions are perfect, it’s easy to make money in a bull market.

In bear market times like these, investors and advisors need to rely on their skills and patience to find bargains and protect their portfolios

How Are You Using Your Skills and Patience to Find Bear Market Stock Bargains?

Do you find it easier or harder to find investment bargains during Bear Markets?

Please don’t hesitate to reach out with questions. Thanks for reading.

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.

Image credit: Mountainous Landscape with Bear in the Foreground, Date unknown, Maximilian Josef Wagenbauer, (German, 1774-1829), Germany, 19th century, Lithograph, Cleveland Museum of Art.