A bear market, as opposed to a correction, is defined by stocks dropping 20% in value or more.
We’re not in a bear market. Yet.
We are in what is called correction territory. The Dow Jones peaked at about 26,600 in January. It opened for trade May 4 at about 23,900. That’s a decline of 10%. Bear territory would be a Dow at 21,300.
But some stocks are in serious bear market territory. Kraft Heinz Co (NASDAQ:KHC) is down 40%, from about $93 per share to May 4’s $58.01 close. Proctor & Gamble Co. (NYSE:PG) is down almost 23%, to $72.43, since January.
Blame rising oil prices, a looming trade war, and general uncertainty. The bearish attitude in consumer staples is spreading to the rest of the market.
What do you do now?
Old Bears Hibernate in Income
If you have a multi-decade investment horizon, do nothing.
I did nothing during the 1987 crash, nothing during the dot-com crash, and I did nothing during the great recession. I watched my holdings fall in value, but they came back. For a young investor, selling into a bear just turns market losses into cash losses. If you’re not a trader, don’t try to time things.
But what if you’re my age, 63 and rising? What if you’re all-in, trying to grab that retirement brass ring, and can’t wait for the next bull to come along?
That’s what income stocks are for.
Ford Motor Company (NYSE:F) is down from $13.23 in January to $11.36 now. But as long as it can pay that 15 cents per share dividend, and it earned 43 cents per share in its most recent quarter, we’re good. Such stocks are even bigger bargains when the bear strikes.
Did you know AT&T Inc. (NYSE:T) is now trading at a yield of 6%? It needs to earn 50 cents per share to meet its dividend payments. Last quarter it earned 85 cents. You can collect cash while you wait out its bear market.
Young Bears Look for Growth
The current uncertainty is caused by stupid policies on the one hand, and uncertainty on the other.
Trade wars are stupid. Tax cuts during periods of growth are stupid.
Uncertainty is just as bad. What happens in November could, at best, freeze present policy in place for another two years, or it could cause policymakers to double-down on stupid.
In that case you look for certainty and look for growth. Look outside the U.S.
I have been pounding the table on behalf of Alibaba Group Holding Ltd (NYSE:BABA) for two years now. Since I got into it, in November of 2016, its price has doubled. Asian governments aren’t democratic, but their policies aren’t uncertain, either. Their people are young, scrappy and hungry.
Europeans have been abandoning U.S. equities because the euro is up against the dollar. Take advantage with some European stocks. Adidas AG/S ADR (OTCMKTS:ADDYY), the German athletic shoe outfit, has been kicking Nike Inc (NYSE:NKE) butt lately, but Kanye West recently took a bite out of Adidas’ stock price. Grab some and you’ll be going for growth and a strong currency.
Cash is King
Another good place to hang out in a bear market is cash. Cash doesn’t make money in a bad market, but it doesn’t lose money, either. My retirement account has been overloaded with cash for a few years now.
If you have cash and are worried about inflation, see about buying Floating Rate Notes, whose returns adjust with inflation. The absolute return is always tiny, but you’re protected against inflation. Short-term government notes are another great option. Just buy new ones when the old ones expire.
You beat the bear with dividends, geographic diversification, and cash. If you’re 26, like my son, however, just keep what you have in an index fund and remember that time is on your side.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F, T and BABA.
