The S&P 500 this week hit its mid-June low, a level many investors expected to hold as the bottom of the bear market. 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, eventually joining the S&P 500 and Nasdaq. now what? First, let’s clarify our definitions. 20% or more below a recent high is considered a bear market for a specific stock or index. The current bear market in the S&P 500 was triggered on June 16, when the index closed more than 20% below its previous high, which was a record close on January 3. This previous high then becomes the starting point of the bear market. . Thus, the current bear market began in early January and will not be considered over until the S&P 500 closes 20% or more above its market low, which can only be determined in hindsight. However, this does not prevent Wall Street from speculating about when a bottom might occur or when it has already occurred. For a while, that June 16 low looked like a good candidate for a bottom. But on Monday and Tuesday, the S&P 500 closed lower, setting new bear market lows each day. It should be noted that the term “rolling bear market” has also been heard in recent years. It describes a market in which various components are experiencing their own declines of 20% or more, even as the overall index manages to hold. By the way, who decided that 20% was the threshold anyway? We have no answer for you, unless it is the arbitrary number designated for the term bear market, just as a decline of 10% or more from a previous high is reserved for a correction in a stock or index . Past Bear Markets Historically, bear markets in the S&P 500 have lasted an average of 370 days with the index down about 36% from high to low, according to our research compilation. Recent extreme examples of bear markets include the bursting of the dot-com bubble in 2000, which led to a bear market of about 2 1/2 years and saw the index fall by almost 50%; the 2007-2009 global financial crisis, which coincided with a bear market that lasted just under 1 1/2 years and saw the index sink more than 50%; and the Covid pandemic, which saw a bear market of just over a month and the index fell by a third. Importantly, although there is often a link, not all bear markets coincide with recessions. For example, in 1987, the crash called Black Monday neither caused nor caused a recession. And while the economy went into recession from late 1990 to early 1991, the stock market didn’t enter another bear market until the aforementioned dot-com bubble burst nearly a decade later. The Current Bear Market In the current bear market for the S&P 500, which is almost 270 days old, stocks are under pressure as a result of interest rate increases by the Federal Reserve and other central banks. ’round the world, Russia’s ongoing war in Ukraine and the economic implications of China’s zero-Covid policy. The S&P 500 is down about 24% from its all-time high on Jan. 4. But we don’t think the current macroeconomic challenges will involve downturns as deep and lasting as in the previous bear market scenarios mentioned, especially given the resilience we see in the labor market right now. We’re inclined to think that while there may still be more pain ahead, the worst is likely behind us. Investing in a Bear Market There are several options for how different types of people can play in a bear market like the one we’re in. They roughly fall into three camps: traders, passive investors, and long-term investors like us. The Trader At one end of the spectrum, you can approach this market with the mindset of an active trader and bet on the downside, or short stocks, and stay out of stocks entirely. (At the Club, we only buy long stocks, betting they will go up, and we always look to stay invested. Our small cash position can go up or down based on market conditions and other factors.) , a trader in this position should bet that the economic outlook is about to get materially worse. It is certainly possible: Russia could escalate its war in Ukraine; tensions between China and the US over Taiwan could accelerate; and/or Fed rate hikes could plunge us into a deep recession. The problem with going this route, however, is the risk of timing the change correctly. A trader might get out of the market and save himself some trouble, but will he be able to get back into it in time? Very few can pull off that kind of time successfully, and even fewer can do it consistently. Also, we think a trader would be buying off big companies with the best valuations we’ve seen in years, all to hopefully get back to them at slightly lower prices. It’s also worth noting that at the individual stock level, many large companies have already declined much more than the 36% average bear market decline we cited above. The Passive Investor At the other extreme is the fully passive investor, who might want to keep up with the contributions they were already putting into their 401(k), for example, or even increase them. given the fall This investor knows that markets go up and down, but generally in a positive direction over a long enough period of time, and they have chosen not to consider daily, weekly or even yearly fluctuations. It is not as risky for mutual fund and index type investors. But with a hands-off approach, the risk is greater if individual stocks are owned because companies can go out of business. The Investment Club Approach Then there are those somewhere in between, where we fall, who are active investors looking to take advantage of short- to medium-term bouts of volatility to try to improve long-term earnings. While we can look to manage a basic position, buying when the stock looks oversold and selling on relative strength, we are not trying to day trade. At a high level, our focus is the same as it’s always been: buy shares of the short stocks of what we believe are high-quality companies. We don’t like to dip in and out, and we don’t look for buys simply based on the passage of time like you might with a 401(k) contribution every two weeks. Rather, we seek to manage each position independently in the context of a diversified portfolio, focusing on individual stock valuations to try to take money out of the market in the short term while maintaining long-term exposure. We try to be granular in our approach, adding positions when purchases can help reduce our overall cost base, ideally always taking stocks at a cheaper level than in the past, and reducing stocks with relative strength when positions grow. a little too big, in rapid upward moves in an overbought market, or simply when we need to rebuild our coffers. Still, a change in our strategy during this bear market might be to raise cash more quickly on up days, knowing that those looking to trade the market will be in “sell” mode. Conversely, we could also be slower to intervene on dips, understanding that we are no longer in “buy the dip” mode. And given the headwinds facing the economy, we may also be more inclined to target those companies that can better weather a slowdown. Conclusion But as painful as it may be right now, the one thing history tells us is that a bear market is always followed by a bull market. With this in mind and incorporating our understanding of previous bear markets, we are still trying to exploit short to medium term weakness to maximize long term gains. Over the long term, stocks will reflect the company’s fundamentals. While some earnings power may be taking a short-term hit due to macroeconomic pressure, we target those companies where we believe earnings will recover and eclipse previous levels as headwinds macroeconomics decrease. In the words of the late investor Shelby Davis, “You make most of your money in a bear market, you just don’t realize it at the time.” (See a full list of Jim Cramer’s Charitable Trust stocks here.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim has discussed a stock on CNBC TV, wait 72 hours after issuing the trade alert before executing the trade. INVESTMENT CLUB IS ALTERNATE INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, WITH OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTOR CLUB. NO SPECIFIC RESULTS OR BENEFITS ARE GUARANTEED.
People with umbrellas 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 took off its mid-June low, a level many investors had hoped would hold at least the bottom of the bear market. 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, eventually joining the S&P 500 and Nasdaq. now what?
