It is time for investors to once again learn some lessons about bear markets.
Analysts will insist, during a bear market, that we’re not in a bear market. Why, they might say, the S&P 500 is only down 7% from its high of late September! That’s not even a correction!
No analyst worth his or her six-figure compensation will say we’re in a bear market — which is defined as a 20% peak-to-trough decline — until we’re already out of it.
When stocks are going down, analysts say that we’re experiencing “volatility.” Have you ever noticed that stocks are never impacted by “volatility” when they’re going up? When you see the word, “volatility,” it means stock prices are declining.
Since the beginning of October, a bearish pattern has taken hold. We may grind a little higher, but the subsequent decline is always sudden and sharp. Both recent attempts to take the market higher have halted about halfway from the market’s high. That’s bearish.
Value, Not Growth
Another hallmark of a bear market is that analysts who are selling stock start talking about portfolio rebalancing and value. They may even tout dividends.
But what’s value? AT&T (NYSE:T) seems to offer lots of value. Its dividend, which is well-protected by its earnings, yields 6.5%. T stock is also down about 10% since early October, a little more than the broader market.
Maybe value means a diversified industrial conglomerate, like United Technologies (NYSE:UTX). Such companies love to change their assets around, buying companies to create “synergies” and then selling them to become a “pure play.” But United Technologies is also down about 10%.
It’s true that some value stocks are still holding up. Walmart (NYSE:WMT) is down only 3% from its highs. Campbells Soup (NYSE:CPB) is actually up about 10% since the start of October. So is Clorox (NYSE:CLX). Both companies pay dividends. But is that where you want your money to be, in soup and bleach?
Where You Stand Depends on Where You Sit
Where you stand in a bear market depends on where you sit on the razor blade of life.
If you’re under 40, sit still. When you can, buy more tech names. You have time. They will rebound.
If you’re 63, like me, you worry. You need to be defensive. You need to hoard your cash. I bought a three-month Treasury bond recently, and almost one-third of my portfolio is liquid. If I’m buying anything it’s a nice, safe bank stock, like JPMorgan Chase (NYSE:JPM). Not because I expect it to fly (it’s down 9% from its recent peak), but because it’s safe. As you approach retirement, you need and like safe stocks.
The conservatism of investors like me is probably what’s delivering bargains to my kids. Amazon.com (NASDAQ:AMZN) is down nearly 20% from its peak. The same is true of Alphabet (NASDAQ:GOOGL), the parent of Google. Alibaba Group Holding (NASDAQ:BABA) is down over 25%. Now is the time for young investors to look for entry points.
Of course, for a young investor the best thing you can put money into is yourself. My own kids don’t have time to pick stocks. They are in index funds. They’re taking some hits, but even recessions pass, and they’ll be OK.
The Bottom Line
The economic future looks gloomy. Inflation and interest rates are rising, international trade is being hindered by nationalism, and no help can be expected from policymakers until people elect new ones after they’ve suffered a great deal of pain. The $1.5 trillion dollar party called the 2017 tax cut must be paid for.
Bear markets like this one are often the preludes to full-blown recessions, defined as two consecutive quarters (or more) of negative growth. I expect a recession in 2019, so I’m battening down the hatches.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T, BABA and AMZN.