Investing: How Do I Make Money in a Bear Market?
By: Will Hoofman
March 26, 2020
Market outlooks for 2020 from many large firms included increased global growth, higher oil prices, 10-year yields above 2%, and modest single-digit returns in the U.S. equity market. Well, it’s March, and we have negative global growth, oil prices in the $25/barrel range, an equity market that has fallen over 35% peak to trough while 10-year yields hover at 0.85%. Now, the question on everybody’s mind is, “How Do I Make Money in a Bear Market?”
We first need to know the meaning of a bear market. Bear markets are a period when the stock market (an index) declines by 20% or more from a recent high. The S&P 500 Index averages a bear market once every 6 years since 1926. The average market loss during those bear markets is just under 40%. The S&P 500 made a high at 3,393.52 on February 19th and made its low to date at 2,191.86 on March 23rd. This is the fastest the S&P 500 Index has ever gone into a bear market.
Start asking yourself some questions. What was my initial asset allocation? Did I have an 80/20 portfolio or a 60/40 portfolio? What is it now? How much cash do I have on the sidelines? Has my risk tolerance changed? What is my time horizon? Make sure you ask yourself these questions before you do anything. It is very important that you do not act on your current emotions! Once you have answered these questions, it’s time to get to work.
Historically, bear markets provide opportunities. Let’s identify why we are in the bear market and what are some reasons for how to get out of it. First, there is the coronavirus known as COVID-19. This has caused both global demand to slow along with disrupting major supply chains for most industries. Put another way, people are not spending money which means companies will start laying off employees. Secondly, Saudi Arabia and Russia have started an oil war that dropped oil prices significantly and U.S. energy companies are found in the crosshairs. Next, we have bonds at never seen before yields. The 30-Year U.S. Treasury Bond dropped below 1% briefly but stabilized around 1.4%. Finally, it’s a presidential election year. Now that we know why we are in a bear market, what have we done but what measures will help stabilize the market or potentially lead us to a recovery?
The Federal Reserve has stepped up big. I won’t list everything but it lowered the fed funds rate to 0%, commenced the quantitative easing program with no limit which includes commercial mortgage-backed securities, encouraged banks to use the discount window, reduced reserve requirements to zero, coordinated international action to lower pricing on the US dollar through daily liquidity swap arrangements, created a commercial paper funding facility, primary dealer credit facility, and money market fund liquidity facility which will accept municipal debt, and so on and so forth.
The U.S. Government has been working on stimulus packages as well. The first phase that was signed into law on March 8th provided $4 billion for developing and deploying Coronavirus test kits, $1 billion to help small businesses, and increased funding for different administrations and departments such as the Centers for Disease Control and the Food and Drug Administration. Phase 2 was signed into law on March 18th and included over $100 billion towards increased unemployment insurance benefits, federal funds for Medicaid and SNAP, paid sick time and leave for families, and free Coronavirus testing for insured and uninsured. Congress is in the process of passing Phase 3 estimated as $2 trillion in stimulus. The details of this phase have not been released but will incorporate direct payments to taxpayers, billions to small businesses, and billions to specific industries adversely impacted.
What happens next? This is where you come up with your opinions to make educated guesses regarding your portfolio. In my opinion, a vaccine would turn the market around the quickest. Unfortunately, vaccines don’t happen overnight. A successful clinical trial would be a great step in the right direction. The next best thing is flattening the curve regarding new cases in the U.S. The market does not like the unknown. We still don’t know if social distancing has worked. As soon as we see positive data regarding the slowing of new active cases, it could help solidify a bottom in the market. Lastly, businesses opening back up and more specifically, customers spending money at these businesses. Our economy will not turn around unless people start spending money again. How long will people be reclusive? Remember, there will be companies and small businesses that fail. There is no reason to take additional risk investing in these companies unless you have a long time horizon, you are willing to accept additional risk, and have a plan on when to enter and exit.
We will continue to see negative news before it gets better. The unemployment claims number comes out tomorrow. New Coronavirus cases continue to rise. We are heading into earnings season which will allow CEOs to lower their bar for next quarter issuing grim guidance. Just remember, it will get better.
So…Where are you putting your money to work?