How to navigate a bear market — we look to history for answers and tell you how we’re doing it
The S&P 500 touched its mid-June low this week, a level many investors hoped would hold as the bottom of the bear market. The Dow Jones Industrial Average also closed in bear market territory Monday for the first time since the early days of Covid in 2020, eventually joining the S&P 500 and Nasdaq there. What now? First, let’s get our definitions straight. Just under 20% or more below a 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 more than 20% below its previous peak, which was a closing record on January 3. This previous high then becomes the starting point of the bear market. So the current bear market started in early January and will not be considered over until the S&P 500 closes 20% or more above its bear market low, which can only be determined in hindsight. However, that doesn’t stop Wall Street from speculating about when a bottom may or has already occurred. For a while, the June 16 low looked like a good candidate for a bottom. But on Monday and Tuesday, the S&P 500 closed lower, making new bear market lows each day. Notably, we’ve also heard the term “rolling bear market” in recent years. It describes a market in which various components experience their own declines of 20% or more despite the overall index holding up. By the way, who even decided that 20% is the threshold? We don’t have an answer for you, other than that it’s the arbitrary number designated for the term bear market—just as a 10% or more decline from a previous high is reserved for a correction in a stock or index. Historical Bear Markets Historically, according to our compilation of research, S&P 500 bear markets have lasted an average of 370 days, with an index decline of about 36% from peak to trough. Some extreme recent examples of bear markets include the bursting of the dot-com bubble in 2000, which resulted in a roughly 2½-year bear market and caused the index to fall nearly 50%; the 2007-2009 global financial crisis, which coincided with a nearly 1.5-year bear market and caused the index to fall by over 50%; and the Covid pandemic, which endured a bear market of just over a month and caused the index to fall by a third. Importantly, while there is often a correlation, not all bear markets coincide with recessions. In 1987, for example, the crash known as Black Monday neither caused nor led to a recession. And while the economy then went into recession in late 1990 and early 1991, the stock market didn’t enter another bear market until the aforementioned dot-com bubble burst nearly a decade later. Today’s Bear Market In the current bear market for the S&P 500, now nearly 270 days old, stocks are under pressure as a result of rate hikes by the Federal Reserve and other central banks around the world, the ongoing war in Ukraine and Russia, and the economic impact of China’s zero Covid policy. The S&P 500 is down about 24% since its all-time high on Jan. 4. However, we do not believe that the current macroeconomic challenges will lead to the deep and prolonged declines seen in the aforementioned bear market scenarios, especially given the resilience we are currently seeing in the labor market. We tend to think that the worst is probably behind us, even if more pain is yet to come. Investing in a Bear Market There are a variety of ways different types of people can play a bear market like the one we’re in. These can be roughly divided into three camps: traders, passive investors, and long-term investors like us. The Trader At one end of the spectrum, you could approach this market with an active trader’s mindset and bet on the downside, or short stocks and exit stocks entirely. (At the club we just buy stocks long, betting they will go up and always trying to stay invested. Our small cash position can go up or down depending on market conditions and other factors.) As the market is already down over 20% is , a trader in this position would be betting that the economic outlook is about to deteriorate significantly. It’s entirely possible: Russia could escalate its war in Ukraine; China-US tensions over Taiwan could accelerate; and/or rate hikes by the Fed could plunge us into a deep recession. The problem with this route, however, is the risk of timing the turn correctly. A trader could exit the market and save some downside, but will they be able to re-enter in time? Very few can successfully perform this type of timing, and even fewer can do it consistently. Additionally, we believe a retailer would exit great companies at the best valuations we’ve seen in years, only to hopefully re-enter them at only slightly lower prices. It’s also worth considering that at the individual stock level, many great companies have already lost far more than the aforementioned 36% average bear market drawdown. The Passive Investor On the other hand, there’s the totally passive investor who, for example, may simply want to keep up with the contributions they’ve already invested in their 401(k), or perhaps even increase them in the face of the decline. This investor knows that markets move up and down – albeit generally in a positive direction on a sufficiently long timeline – and has chosen not to consider the daily, weekly or even yearly fluctuations. For mutual and index fund investors, it’s not that risky. But with a hands-off approach, risk is higher when holding individual stocks because companies can go out of business. The Investing Club Approach Then there are those somewhere in the middle where we fall who are active investors looking to use short- or medium-term bursts of volatility to amplify longer-term gains. While we try to move around a core position, buying when stocks appear oversold and selling when there is relative strength, we do not attempt day trading. At the high level, our approach is the same as always – we buy shares of the depressed stocks of companies we believe to be of good quality. We don’t like to jump in and out, and we don’t seek purchases simply based on the passage of time like a 401(k) post every two weeks would. Rather, we seek to manage each position independently in the context of a diversified portfolio, focusing on individual stock valuations in order to suck money out of the market in the short-term while maintaining a long-term exposure. We try to be granular in our approach, adding to positions when the purchases can help lower our overall cost basis – ideally always snagging stocks at cheaper levels than historically – and removing stocks based on relative strength when the positions grow a little too big, during rapid upmoves in an overbought market, or simply when we need to replenish our coffers. Still, one change in our strategy during this bear market might be to raise money faster on the up days, as we know those looking to trade the market will be in sell-the-rip mode. Conversely, we might also be slower to react to declines as we understand we are no longer in buy the dip mode. And given the headwinds the economy is facing, we might also be more inclined to target those companies better positioned to weather a slowdown. Conclusion But as painful as it may be at the moment, history tells us one thing: a bear market is always followed by a bull market. With this in mind, and incorporating our understanding of previous bear markets, we remain keen to exploit short- to medium-term weaknesses to maximize longer-term gains. Over the long term, stocks will reflect company fundamentals. While some profitability may be affected in the near term due to macroeconomic pressures, we target companies where we believe earnings will recover and eclipse previous levels as macroeconomic headwinds ease. In the words of the late investor Shelby Davis, “You make the most 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 CNBC Investing Club subscribers with Jim Cramer receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. When Jim spoke about a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS GOVERNED BY OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION SHALL BE OR CREATED BY YOUR RECEIVING OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC RESULT OR PROFIT IS GUARANTEED.
People with umbrellas walk past bulls and bears in front of the Frankfurt Stock Exchange in heavy rain in Frankfurt.
Kai Pfaffenbach | Reuters
The S&P 500 touched its mid-June low this week, a level many investors hoped would hold as the bottom of the bear market. The Dow Jones Industrial Average also closed in bear market territory Monday for the first time since the early days of Covid in 2020, eventually joining the S&P 500 and Nasdaq there. What now?