Warren Buffett, one of the most prolific investors alive, began investing in 1941 at the age of 11 when the SP500 was in a bear market that bottomed at -35% in 1942. Since then, it has gone through a cycle of 13 bear markets, and it has increased its investing activity during each of those bear markets. In his view, buying quality assets at cheap prices is best, and this strategy has served him well over the years.
The average bear market lasts 289 days. The longest bear market lasted 929 days in March 2020, while the shortest lasted 33 days. How long will the current bear market last? Well nobody knows.
What Causes the Bear Market?
Much of the current bear market can be attributed to the Fed’s aggressive monetary tightening to curb inflation, which appears to have peaked at 9.1% in June and slowed to 8.3% in August.
The tightening policy included the scrapping of all COVID-related quantitative easing programs, which was successfully completed in March, followed by an aggressive series of rate hikes that saw interest rates climb from 0.1% to 0.25% in March to current levels increased by 3.25%.
The high inflation environment has put pressure on consumer budgets as households spend more income on high-priced groceries and energy bills, leaving them with less disposable income. This has hit companies selling discretionary products as consumer demand has slowed. Additionally, investors were left with less cash to buy risky assets like stocks and cryptocurrencies.
The war in Ukraine, combined with OPEC+’s supply tightening policy, has sent oil and gas prices skyrocketing. This has resulted in higher manufacturing costs and consequently higher retail prices. According to a recent article by Caroline Valetkevitch on Reuters, big companies are like Amazon
In addition, investors are switching to bonds as interest rates rise, as yields rise and bonds are considered low-risk compared to stocks. The yield on the 2-year US Treasury bond is up from 0.786% at the start of the year to 4.068% today.
So how do you navigate the bear market?
First, let me mention that the ability to rotate into inflation-proof or energy stocks is likely gone or thinning. A quick look at the YTD performance of SP500 stocks in 2022 will show you that stocks in the energy sector are the winners with stocks like Occidental Petroleum
As the bear market nears bottom, valuable assets like bitcoin, tech stocks, and real estate stocks are starting to look cheap, and it’s probably a good idea to start doing your research and building a watch list.
A good strategy for investing during this phase of the bear market involves dollar cost averaging (DCA) into high conviction assets that are cheaply valued. This involves buying small amounts at regular intervals, for example monthly or even weekly. If this is done consistently over a period of time, the investor achieves a fair average purchase price for the selected property.
When is the bear market expected to bottom?
Timing a bear market bottom is a difficult task. It can also be a frustrating ordeal when what you think is the dip continues to fall and if you try to time it, prices fall into the dip of the dipity dip.
In my opinion, the logical approach is to look for signs that might influence a change in the fundamentals that are driving the bear market. For example, closely monitoring the inflation rate is a good place to start. If inflation falls significantly towards the Fed’s 2% target, the Fed could be forced to halt tightening and this could lead to the start of another bull market.
A strong focus on the oil market and signs of lower oil prices could mark the bottom of the bear market and trigger another bull run.
Furthermore, following the money has always been a sound strategy in investing. On an individual level, you might not have the resources to do massive research compared to giants like BlackRock
For example, the surge in bitcoin trading against the pound sterling on Monday last week was a clear sign of where the money is going. According to Reuters, the BTC/GBP pair averages £54.1 million per day. However, trading volume rose to £846m on Monday after the UK government intervened in bond markets to bail out overstretched pension funds.
Disclaimer: Investing in the financial markets is not for everyone and the content used in this article is educational and does not constitute investment advice.
Disclosure: I own bitcoin and other cryptocurrencies.