The S&P 500 this week fell to a mid-June low, a level many investors hope to hold as the bear market bottoms out. The Dow Jones Industrial Average also closed in bear market territory on Monday for the first time since the early days of Covid in 2020, finally joining the S&P 500 and Nasdaq there. So what now? First, let’s go straight to our definition. A close 20% or more below the recent high is considered a bear market for a particular stock or index. The current bear market in the S&P 500 was triggered on June 16 when the index closed 20% below its previous peak, which was a record closing January 3. which then becomes the starting point of a bear market. . So, the current bear market started at the beginning of January and will not be considered over until the S&P 500 index closes above 20% below the bear market low. can be identified in hindsight. However, that doesn’t stop Wall Street from speculating about when the bottom was made or when it might have happened. For a while, that June 16 low looked like a good candidate for a bottom. But Monday and Tuesday, the S&P 500 closed lower, setting new bear market lows each day. Notably, the term “rolling bear market” is also a term we’ve heard in recent years. It depicts a market in which various components are experiencing their own declines of 20% or more, although the overall index manages to hold up. By the way, who decided that 20% is the threshold? We don’t have an answer for you, except that it’s an arbitrary number assigned to bear market terminology – like a 10% or greater drop from the previous high is earmarked for a correction. stocks or indices. Past Bear Markets Historically, the S&P 500 bear market has lasted an average of 370 days with an index drop of about 36% from peak to trough, according to our research pool. Some recent negative examples of a bear market include the burst of the dot-com bubble in 2000, which led to a bear market that lasted about 2 and a half years and saw the index drop almost 50%; the 2007-2009 global financial crisis, which coincided with a bear market that lasted just under a year and a half and saw the index plunge more than 50%; and the Covid pandemic, which saw the market fall for just over a month and the index down a third. Importantly, although there is often a connection, not all bear markets coincide with recessions. For example, in 1987, the crash known as Black Monday neither caused nor led to the recession. And while the economy then fell into recession from late 1990 to early 1991, the stock market didn’t enter another bear market until the aforementioned dot-com bubble popped for nearly a decade. century later. Today’s Bear Market During the current bear market in the S&P 500, now nearly 270 days old, stocks are under pressure as the Federal Reserve and other central banks around the world raise interest rates, Russia’s ongoing war in Ukraine, and the economic implications of China’s zero-Covid policy. The S&P 500 Index is down about 24% from its all-time high on Jan. 4. But we don’t think the current macroeconomic challenges imply a drop as deep and long-lasting as in previous reports. bear market scenario mentioned earlier, especially considering the resilience we see in the current labor market. We tend to think that, while there may still be some pain ahead, the worst is likely to be behind us. Invest in a bear market There are different options so different types of people can play a bear market like the one we find ourselves in. Traders At one end of the range, you can approach this market with an active trader’s mindset and bet on bearish stocks, or go short and exit the stock altogether. (At the Club, we only buy long-term stocks, bet they will appreciate, and always seek to continue investing. Our small cash position can rise or fall depending on market conditions. and other factors.) With the market fell more than 20%. , a trader in that position would have to bet that the economic outlook is about to materially deteriorate. Certainly possible: Russia could escalate the war in Ukraine; tensions between China and the US over Taiwan may accelerate; and/or a Fed rate hike could push us into a deep recession. The problem with going this route, however, is the risk of exact turnaround times. A trader can exit the market and save some losses, but can they get back in time? Very few people can successfully do this kind of timing, and even fewer are able to do so consistently. Furthermore, we think a trader would buy back big companies at the best valuations we’ve seen in years, all to win them back, hopefully, for less than a year. little. It’s also important to note that, at the individual stock level, many large companies have fallen more than the 36% bear market average drop we cited earlier. Passive Investors At the other extreme, there are completely passive investors who may just want to keep up with whatever contributions they’ve made to their 401(k), or even have can increase them when decreasing. This investor knows that markets go up and down – although, in general, in a positive direction for a long enough time – and they have decided not to affect daily, weekly or even daily movements. annual solstice. It is not as risky for mutual fund and index investors. But with a no-holds-barred approach, the risk is higher than owning individual stocks because companies may go out of business. The Investment Club’s Approach Then there are those somewhere in between, where we’re falling, who are active investors looking to capitalize on short- or medium-term swings to try to strive to improve long-term profits. While we may find a way around the core position, buying when the stock appears oversold and selling at relative levels, we are not trying to day trade. At a high level, our approach remains the same as always – buy shares in undervalued stocks of what we believe are high-quality companies. We don’t like jumping in and out, and we’re not looking to buy simply based on the passage of time as one can with a fortnightly 401(k) contribution. Instead, we prefer to manage each position independently in the context of a diversified portfolio, with a focus on pricing individual stocks in an attempt to suck money out of the market in the near term, while maintaining long-term exposure. We strive to be more granular in our approach, adding positions when buying can help reduce our overall cost base – ideally always winning stock at a cheaper rate we have in the past – and stripping stocks based on relative strength when positions get too big, quickly move up in an overbought market or simply when we need to rebuild the vault mine. However, a change to our strategy during this bear market could be to raise cash faster on bull days, knowing that those looking to trade in the market will be in the middle of nowhere. “sell-off” level. Conversely, we can also be slower in reducing prices, understanding that we are no longer in “buy at discount” mode. And given the difficulties facing the economy, we may also be inclined to target companies that can weather the downturn better. The bottom line But the most painful thing can be right now, one thing history tells us is that what always follows a bear market is a bull market. Keeping this in mind and incorporating our understanding of previous bear markets, we are still aiming to exploit weakness in the short to medium term to maximize profits in the long term. In the long run, the stock will reflect the fundamentals of the company. While some earnings are likely to suffer in the short term due to macroeconomic pressures, we are targeting those companies where we believe earnings will rebound and overshadow futures. the previous level when macro difficulties eased. In the words of late investor Shelby Davis, “You make most of your money in a bear market, you just don’t realize it at the time.” (See here for a complete list of stocks in the Jim Cramer Charitable Foundation.) As a CNBC Investment Club subscriber with Jim Cramer, you’ll receive trading alerts before Jim makes a trade. Translate. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charity portfolio. If Jim had talked about a stock on CNBC TV, he would have waited 72 hours after issuing a trading warning before taking a trade. THE ABOVE INVESTMENT CLUB INFORMATION IS FOLLOWING OUR TERMS AND CONDITIONS AND PRIVACY POLICY, WITH OUR DISCLAIMER. NO OBLIGATION OR DUTY ALSO EXISTS OR WAS CREATED BY VIRTUE WHEN YOU RECEIVE ANY INFORMATION PROVIDED BY CONNECTING TO THE INVESTMENT CLUB. NO GUARANTEES SOME OUTCS OR SPECIFIC PROFITS.
Umbrella-holders walk past bulls and bears outside the Frankfurt stock exchange during heavy rain in Frankfurt, Germany.
Kai Pfaffenbach | Reuters
The S&P 500 this week fell to a mid-June low, a level many investors hope to hold when the bear market bottoms out. The Dow Jones Industrial Average also closed in bear market territory on Monday for the first time since the early days of Covid in 2020, finally joining the S&P 500 and Nasdaq there. So what now?
