Are we headed for Bear Territory?

 

bulls-bears
Thanks to boockreport.com for image

We have been in a bull market for several years now and people in the media are now saying we are headed for a bear market.  Is it true?  If only I knew for sure!

A Bear Market is a period after the stock market (as measured by numerous indices) has fallen by at least 20% from it’s recent highs.  Let’s take a look at things over the past few months.

The Dow Jones Industrial Average hit a high of 26,951.81 on 10/03/2018.  As of this writing (and the market is not closed yet) it stands at 24,478.02.  So, it is down by 2,473.79 points or 9.179% off it’s high.  Not quite bear territory yet.  The Dow Jones Industrial Average is a price-weighted average of 30 large stocks traded on the New York Stock Exchange and the Nasdaq Exchange.

The Standard & Poor’s 500 Index hit its recent high at 2,940.91 on 09/21/2018 and as it stands right now is trading at 2,649.99.  It is down by 290.92 points or 9.892%.   The S&P 500 is a market-capitalization-weighted index of 500 of the largest U.S. Publicly Traded Companies by market value.  This index is not in bear territory yet.

The NASDAQ Composite Index hit its recent high on 08/30/2018 of 8,133.298 and as of this writing it is trading at 7,104.53.  This index has fallen by 1,028.768 points or 12.649%.  The NASDAQ Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the NASDAQ Stock Exchange.  This index has also not hit bear territory … but it seems to be closer than the other two common indices.

The one index that I watch as closely as the three listed above is the Vectorvest Composite Index.  This is simply and arithmetic average (not a weighted average) of the 8,100 + stocks tracked at Vectorvest each day (this will include large high priced companies as well as tiny penny stock type companies).  On August 29, 2018 this price hit a high of $49.057 and today as I write this it is at about $43.6802.  Therefore it is down from it high by $5.377 or 10.96%.  Again, not quite in bear territory yet.

If we go into a bear market period … how long could it last?

I’ve shown this graphic before … but it may be time to show it again:

Bull Bear Markets
Figure 2

As you can see in Figure 2 … Bear Markets (represented in orange) do not last very long as compared to Bull Markets (represented in blue).  The longest Bear Markets were 1929 – 1932 and 2000 to 2003 (2.8 years and 2.5 years respectively).  The average length of a Bear Market based on this graphic was about 1.4 years or about 16 or 17 months.

According to First Trust Portfolios, the average bull market period lasted 9.1 years with and average cumulative return of 480% while the average bear market period lasted 1.4 year with and average cumulative loss of 41%.  This is from 1926 through September of this year (2018).

No, I don’t know if we are headed for another Bear Market at this time.  If we are, it is not because of fundamentals of the U. S. Economy or U. S. Corporations.  The economy is doing great and the U. S. Corporations are at all time high profits and cash flow.

In fact, the chart below shows the S&P 500 companies Earnings Per Share over the past 10 years:

SP Earnings
Figure 3 – Vectorvest graph

As you can see, earning hit a low of $1.80 per share on May 15, 2009 and since then has climbed to a high of $6.13 per share as of November 30, 2018.  This is an increase of $4.33 per share or 240.5% over the past 9.5 years.  On a compounded annual basis an individual would have earn a minimum of 13.743% per year to grow $1.80y to $6.13 over 9-1/2 years.  Not an easy task, but doable.

This next chart also shows that over the past 10 years (40 quarters) there has been positive GDP growth in all but 7 quarters:

GDP Growth
Figure 4

As long as we have rising corporate earnings and positive GDP growth, can we enter a Bear Market?  The answer is YES … but again not for fundamental reasons.  We can enter a Bear Market for the following reasons ONLY:

  • We have CLOWNS in the U. S. Congress and
  • We have COMEDIANS in the U. S. Media Outlets.

The clowns are not acting to do what is necessary to secure our borders and trade imbalance with countries abroad … and the Media is putting FEAR into the hearts and minds of the investing public by forecasting doom and gloom right around the corner and dissing our U. S. President everytime he tries to do what is in the best interest of the country from an economic point of view.

It’s a SELF-FULFILLING PROPHECY!

For as long as the investing public believes what the media says and waits for congress to act in a fearful frame of mind … the money will stop flowing into the markets and start to flow out of the markets and the markets will dip in value.  That creates BEAR MARKETS.  Eventually, Greed and Hope will come back to the minds and hearts of the investing public and money will move into the markets again pushing them back to even higher highs than anyone ever thought possible – creating another fantastic BULL MARKET.  It always works that way.  It is not rocket science and you don’t need and economics degree from the finest business schools in America to figure it out.

If we are headed for a Bear Market … What can you do to continue to make money in the markets?

Here’s 10 ideas I found at dummies.com:

  1. FIND GOOD STOCKS TO BUY:  In a bear market both good and bad stocks will go down … but the good will recover and get back on the growth track while the bad will stay down or the companies will even go out of business.
  2. HUNT FOR DIVIDENDS:  a dividend comes from net income while a stocks price comes from the buying and selling of a stock.  When a stock’s price goes down because selling is higher than buying (supply and demand) and the company is still earning a profit and still paying a dividend, it becomes a good buying opportunity for those seeking income.  Here you may talk to your financial advisor about buying into one or more of the 50+ Dividend Aristocrats of the S&P 500.  You can find a list of those right here.
  3. UNEARTH GEMS WITH BOND RATINGS:  A bear market usually occurs in tough economic times (or when the Media continues to make us believe one is coming – ha ha ha) and it reveals who has too much debt to deal with and who is doing a good job in managing their debt.  The bond rating is a good snapshot of the companies creditworthiness.  You will want to look for companies that have Moody’s or Standard & Poor’s credit ratings of A, AA or AAA.
  4. ROTATE YOUR SECTORS:  Using Exchange Traded Funds (ETFs) with your stocks can be a good way to rotate in and out of good and bad sectors.  Different sectors perform well during different times of the ebb and flow of the economic business cycle.  When the economy is roaring along and growing big ticket items such as autos, machinery, high technology, and home improvement do very well.  These are referred to as cyclical stocks and sectors that include these are manufacturing and consumer discretionary.  Stock of companies that sell big ticket items or “wants” do  well when the market and economy is doing well.  If it looks like we are entering a recession you may want to focus on defensive stocks (not military defenses) tied to human needs such as food and beverage (in the consumer staples sector) and utilities and such stocks.  I know that during bad times it seems that “entertainment” and “booze” stocks do very well.
  5. GO SHORT ON BAD STOCKS:  Bear Markets can be tough for good stocks, but they’re brutal to bad stocks.  When bad stocks go down, they can keep falling and give you an opportunity to profit when they decline further.  This one is pretty risky so I truly urge you to consult your financial advisor before attempting it … however it can be very lucrative if the stocks continue to plunge.  Another avenue here to lower your risk would be to buy PUT options on bad stocks.  As the stock goes down your put option grows in value.
  6. CAREFULLY USE MARGIN:  Many investors don’t use margin, but if you use it wisely, it’s a powerful tool.  Using it to acquire dividend-paying stocks after they’ve corrected can be a great tactic.  Margin is using borrowed funds from your broker to buy securities (also referred to as a margin loan).  Keep in mind that when you do employ margin, you do add an element of speculation to the mix.  Buying 100 shares of  a dividend-paying stock with your own money is a great way to invest, but buying the same stock with margin adds leverage and thus risk to the situation.  Again, seek the guidance of a competent financial advisor.
  7. BUY CALL OPTIONS:  A call option is a bet that a particular asset (stock, index or ETF) will rise in value in the short term.  Buying call options is about speculating and not investing.  Remember, a call option is a derivative, and it has a finite shelf life;  it can expire worthless if you’re not careful.  The good part about a call option is that it can be inexpensive to buy and tends to be a very cheap vehicle at the bottom (Bear Market) of the stock market.  This is where your contrarian side can kick in.  If the stock price has been hammered but the company is in good shape (solid sales, profits, and so on), betting on a rebound for the company’s stock can be very profitable.
  8. WRITE A COVERED CALL OPTION:  Writing a covered call  means you are selling a call option against a stock you own; in other words, you accept and obligation to sell your stock to the buyer (or holder) of the call that you wrote at a specified price if the stock rises and meets or exceeds the strike price.  In exchange you recieve income (referred to as an option premium).  If the stock does not rise to the options specified price uring the life of the options, then you are able to keep your stock and the income from doing (selling) the option.  This is a way to boost your yield on your stock position by 5%, 7% or even more than 10% depending on market conditions.  The downside is that you may be obligated to sell your stock at the options price (strike price) and you forego the opportunity to make gains above that specified price.  Done right, a covered-call option can be a risk free strategy.
  9. WRITE A PUT OPTION TO GENERATE INCOME:  Writing a put option obligates you (the put seller) to buy 100 shares of a stock (or ETF) at a specified price during a period of time the option is active.  If a stock you like just fell and your interested in buying it, consider instead writing a put option on that same stock.  The put option provides you income (called the premium) while it obligates you to buy the underlying stock at the agreed upon price.  But because you want to buy the stock anyway at the options strike price, it’s fine, and you get paid to do it too.  Writing put options is a great way to generate income at the bottom of a bear market.  The only “risk” is that you may have to buy a stock that you wanted to buy anyway … how Cool is that to get paid for potentially investing money in a stock you want at a lower price?
  10. BE PATIENT:  If you’re going to retire ten years from now (or more) … or feel you will still be alive in ten years and need future income from your portfolio … a bear market should not make you sweat.  Good stocks come out of bear markets, and they’re usually ready for a subsequent bull market.  So, don’t be so quick and let the emotion of FEAR move you out of a stock you now hold.  Just keep monitoring the company for it’s vital statistics (growing sales and profits and so on), and if the company looks fine, then hang on.  Keep collecting your dividend, selling call options against it and hold the stock as it zigzags into the long-term horizon.

Though I cannot guarantee it … I am pretty sure the markets will be higher in ten years than where they are today.  If we go back in time and look at annual returns of the S&P 500 from 1928 through present time we see the following annual returns as well as 10 year rolling returns from 1937 through 2018:

SPX-1

SPX-2
Figure 5

You will first of all notice that out of all 90 years (1928 – 1918) there were just 28 down years and of these there were only 6 years that had drops of 20% or more.  Also out of 81 ten-year rolling periods (1937 – 2018) there were only 4 ten-year periods that say negative returns and 77 ten-year rolling periods that had positive returns.  Also, 31 of these 77 periods showed returns of 100% or more.

I hope this has helped many of you as you try to make sense out of this stock market today and over the past few weeks.  As I close this article today from the previous time I wrote about the value of the indices above in this article (and it has taken a couple of hours to put it together) … this is what we see:

  • The DJIA was at 24,478.02 and it is now at 24,713.55 … up 235.53 points
  • The S&P 500 was at 2,649.99 and it is now at 2,671.38 … up 21.39 points
  • The NASDAQ Composite was at 7,104.53 and it is now at 7,131.897 … up 27.37 points and
  • The VVC was at 43.6802 and it is now at 43.853 … up 17 cents.

Good luck with your future investing.  If you have a financial advisor check in with him or her on any moves you want to make in the future.  If not, your own your own since all I am trying to do is provide a little education.

Thank you,

Jerry Nix

Disclaimer:

This information is not recommendations for you to purchase or sell any investments outlined in this article.  The information is being shared for educational purposes only.  I recommend that you seek the advice of a licensed and competent financial advisor before taking actions on your portfolio if you see a need to after reading this article.

The author of this article is long on the following investments outlined herein:  No specific investments were mentioned in this article.

 

 

 

 

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