Arguably, not as many people are concerned about an incoming bear market as there should be. Primarily, this has to do with what I believe is a misguided anticipation of chronic inflation. But optimism also rings strongly because of the economic recovery narrative. Namely, we suffered a once-in-a-century pandemic via the novel coronavirus. Once this threat is gone for good, we can resume our post-Great Recession bullishness.
Although the concept brings up heated discussion, I encourage readers to consider the very real possibility of a bear market. How can I say this with the major indices pinging all-time record highs? Mainly, money velocity has slipped to near all-time lows, which effectively negates the “good work” that the Federal Reserve is doing. If no one spends money, will stimulus spark inflation?
But then the counterargument becomes, hasn’t money velocity been declining since the late 1990s? You’re absolutely right it has. So then, the follow up: If money velocity is such a critical indicator for a potential bear market, how come we enjoyed a robust bull market as velocity faded? While there are many explanations, one in particular is stock buybacks. Here’s how the Harvard Business Review explains it:
“Stock buybacks made as open-market repurchases make no contribution to the productive capabilities of the firm. Indeed, these distributions to shareholders, which generally come on top of dividends, disrupt the growth dynamic that links the productivity and pay of the labor force. The results are increased income inequity, employment instability and anemic productivity.”
This really hits the nail on the head. We see plenty of income inequity and employment instability. And productivity is only up because the employment level depleted 4.5% since the pre-pandemic comparison. Therefore, the fact that the major indices are up while the fundamentals are complete junk speaks to a bear market, not a bull.
If you’re still not convinced that we could see a bear market over the horizon, consider the speculation via stock trading on margin. It’s reached all-time record highs. Remember that margin calls on irresponsible bets gone wrong contributed to the 1929 crash. I’m not suggesting that history will repeat itself exactly, but you need to at least be prepared for the possibility of a severe correction.
To prepare and protect yourself, here are seven types of stocks to consider during a downturn.
- Dividend Stocks
- Food and Agricultur
- Consumer Staples
- Big Tech
- Cheap Entertainment
- Cynical Stocks
Types of Stocks to Buy for a Bear Market: Dividend Stocks
Generally speaking, if you anticipate volatility or even a bear market, it’s better to have more exposure to dividend stocks. I’m not breaking new ground here, as this is common knowledge. However, Kiplinger’s Carolyn Bigda brought some hard numbers to the concept:
“It’s no secret that dividend-paying stocks often come out ahead during a market sell-off. In 2008, when Standard & Poor’s 500-stock index nosedived 37%, the S&P 500 Dividend Aristocrats, an index of large companies that have raised their dividends every year for the past 25 years, surrendered a more tolerable 22%.”
To be fair, not all dividend stocks protect you against a bear market. In the case of the 2008 global financial crisis and subsequent recession, several banking firms that did pay dividends absorbed the brunt of the damage. So, don’t just buy dividend-bearing companies merely because of their dividends; the fire chief cannot be the arsonist.
But aside from common-sense warnings, well-established blue chips with predictable revenue streams represent an excellent choice if you still want equities exposure but fear a bear market. If anythicynicalng, you’ll get paid as you bite your fingernails.
It’s often stated that you find out who your real friends are when you’re in the midst of troubles, not when things are going well. Personally, I don’t have many non-family friends, and that’s quite fine by me. Of course, I know hundreds of people, but if I’m in trouble, I have a core group I can depend on.
Why do I mention this? Because a crisis, such as the coronavirus, brings clarity by exposing who people really are. You know another crisis that brings clarity? You guessed it, impact to the utilities sector. When the power goes out, bad things happen. In 2019, CNN ran an article that described how a 1977 power outage in New York City “turned into a crime rampage.”
When people lose something, anything, they look for scapegoats. So am I surprised that many folks go nuts when the lights go out? Of course not! But that’s also why utilities offer a great place to park your money during a bear market. This is about as critical of an industry as you can get.
Types of Stocks to Buy for a Bear Market: Food and Agriculture
When faced with a possible bear market, investors need to think in elemental terms. During a bullish phase in the economy, people have jobs and money to spend. When that circumstance no longer applies, people start to pinch their wallets, only spending money on the essentials. And what could be more essential than food and water?
That’s why I’ve been bullish lately on food-processing companies like Archer Daniels Midland (NYSE:ADM). Not only is the company one of the dividend aristocrats — having consistently raised its dividends for at least 25 years consecutively — it’s a vital component of our food supply chain. Further, the company has begun focusing on plant-based proteins, which is a burgeoning sector, especially for younger consumers.
More importantly, the nation has a massive agricultural crisis in that fewer and fewer Americans want a career in this age-old industry. In fact, this agricultural demographic crisis has been a problem for decades, not just recently. To me, this suggests that reduced supply and massive demand may be a boon for food and agricultural stocks, even during a rough bear market.
In a bull market, consumer staples just don’t have the appeal of high-flying growth stocks. Before you email my editor that you bought consumer staples during this run up, please note that I’m speaking in generalities. Most people understand this but because this is the internet, I’ve got to nip the because-I-don’t-do-this-no-one-else-does-it-either trolls in the bud.
Anyways, the pedestrian nature of consumer staples stocks become very attractive indeed during a bear market. We already saw evidence of this during the initial onslaught of the Covid-19 pandemic. Remember the huge run not on cash but on toilet paper?
Well, whatever you think about the TP pandemonium, it was great news for consumer staples giants like Procter & Gamble (NYSE:PG) and Kimberly Clark (NYSE:KMB). Not surprisingly, these two stocks performed quite well in 2020 following the virus’s breach.
Moving forward, if we do see a bear market, I’d be much more comfortable putting my money to work with consumer staples. Their underlying businesses represent stuff we need, not necessarily stuff we want.
Types of Stocks to Buy for a Bear Market: Big Tech
As a rule of thumb, you want to avoid technology stocks during a bear market because they tend to focus on high growth. But a pessimistic market environment implies deflation, not inflation. Therefore, arguably most investors seek out value or stability, not exciting aspirational narratives. However, tech is a massive sector with several individual categories. When the smelly stuff hits the fan, investors can rely on certain Big Tech firms.
One in particular that stands out is Microsoft (NASDAQ:MSFT). Yes, it’s an obvious idea, but that doesn’t take away from its utility, especially in a bear market. Primarily, the Software-as-a-Service giant dominates professional work platforms. You really can’t progress anywhere in academia or the corporate environment without having a basic knowledge of Microsoft Office applications.
Another Big Tech segment to consider is cybersecurity. Here, I believe corporations that serve enterprise-level clients such as IBM (NYSE:IBM) offer intriguing opportunities. This is especially true because of the spate of cyberattacks that have impacted our energy, fuel and food supply chains. Unfortunately, these attacks will only continue, so major cybersecurity firms are basically permanently relevant.
Not only does a bear market bring clarity, it also sparks the need for respite. You’ll recall from your history books — or maybe not — that the so-called Golden Age of Hollywood came about from the ruins of the Great Depression. During this awful period, Americans flocked to the box office to get their minds off the terrible hardships.
It’s difficult to know for sure if history will repeat itself should a bear market materialize soon. Both the influx of technology and the paradigm-disrupting pandemic changed our social behaviors. Therefore, it’s possible that companies like Cinemark (NYSE:CNK) represent a viable discount. But just as well, Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) could steal its lunch.
I’d also look into video game companies — and I’m not mentioning that meme stock. Rather, several firms exist in this burgeoning market, including Zynga (NASDAQ:ZNGA) and Activision Blizzard (NASDAQ:ATVI).
The idea here is that even though video games represent wants, not needs, in reality, no one can continue grinding away through difficult challenges without a physical and mental break. Therefore, you can trust certain names in the entertainment sector, even in a bear market.
Types of Stocks to Buy for a Bear Market: Cynical Stocks
This is the most controversial segment that you can invest in during a bear market. But before you send off an angry email to the editor, please note one thing: The subject at hand is market reversals to the downside. Therefore, we can agree that this is hardly a pleasant dinner room conversation. Instead, during periods of collective pessimism, we must focus on turning lemons into lemonade.
That’s the basic principle behind cynical stocks. What do I mean by this? Take alcohol consumption as an example. Research indicates that economic recessions cause stress, which in turn may lead to heavier drinking. Therefore, you may want to consider buying alcohol stocks knowing that the demand base will likely increase. Ditto for other vices such as tobacco and cannabis firms.
As some critics might say, that sounds gross. But cynicism sometimes has a logical component. For instance, when I discussed the increase in firearms sales for a segment on CGTN America, I stated that people who feared physical assaults due to stigmatization bought guns to protect themselves.
But if you really want gross, you can look at publicly traded penal institutions. Since recessions may spark a greater increase in crime, you’d anticipate that such companies will have a lot of “business.”
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.