No joking about it, it’s a bear out there. In June the U.S. stock market dropped 10.2%, the biggest loss for the month of June since the 1929 Great Depression. With the market down about 20% since October 2007, that is a lot of grief and stress for investors as $2.1 trillion in stock value has been lost.
Financial analysts recommend taking the long view, relying on historic averages that show over the long term the stock market will rebound. Still, they acknowledge it is a tough and anxious time for investors.
“Investing during bear markets can be treacherous, but it offers great opportunity for those willing to deal with the volatility,” said Ashby M. Foote III, chief investment officer, Vector Money Management, Jackson. “It will try your emotions and it is important for investors to stay within their risk comfort zone. The current bear market has the added feature that the sector under the most duress is the financial sector which, of course, is the same sector that includes the professional investor business. So we have Wall Street analysts and portfolio managers passing judgment on stocks while many of their parent companies are writing off billions in losses and laying off thousands of employees. It is reasonable to assume that such a dark cloud hanging over Wall Street would have some influence on the perspective of the analyst community.”
There can be a danger in looking only at the negatives. Foote said the reality is many parts of the economy are doing extremely well right. For instance, in agriculture soybeans, wheat and corn have all traded to all-time highs in the past six months. With that, the industries that support farming like seed, fertilizer and machinery are enjoying boom times.
And as much as people despise $4 gasoline, the energy sector is enjoying a boom as well.
“Investors need to make sure they have some exposure to the parts of the economy that are healthy right now even though some of the best bargains may be in the really distressed areas like home builders and banking,” Foote said. “The last advice I would offer is don’t change your investment time horizon in the middle of a bear market. If you started out to be a long-term investor, don’t let the zigs and zags turn you into a market timer. That is a recipe for buying high and selling low.”
Nancy Lottridge Anderson, a financial advisor who is president of New Perspectives Inc. in Ridgeland and an assistant professor of finance at Mississippi College, as well as a contributing columnist for the Mississippi Business Journal, is starting to hear from more and more people expressing concerns about this market.
“Many of these lived through the dot-com bubble of 2001 and want to make sure they are positioned well,” Anderson said.
Her advice, hard as it may be, is to try to keep your emotions out of it. When you see your accounts sliding month after month, it’s only natural to feel anxious.
“Just don’t let it turn into panic, because that is when you’ll make a knee-jerk decision,” Anderson said. “Try to stay as rational as possible. In fact, that is usually my job when this happens—to stay rational and analytical. Remember, recessions are part of the business cycle. You cannot invest in the market and expect it to always go up. Over the long haul, stocks are still great returning investments, but it’s not a straight line.”
Your stocks represent real businesses. During a downturn is a good time to see who is really good at managing a business. Anderson said if a business is still selling products and services and is still producing good cash flow, that represents value. The market value of the stock may be depressed because of overall market conditions, but if the business is good, the real intrinsic value will eventually win out.
“So, during this time, check out your holdings with an analytical eye,” she recommends. “You may do some minor adjusting if you notice some weakness. Of course, this is not the time to do wholesale housecleaning. For some stocks, you may want to wait until year-end to do some housecleaning for tax purposes. There’s no hurry, unless you own a real dog.”
But if you have cash to invest, this is like Wall Street is on sale. Anderson advises looking for businesses with good cash flow and managers who can navigate through difficult waters.
“When this thing comes back (and it will), you’ll make money,” She said.
If you are brave, there are several possible bargain areas that Anderson points to:
1. The financial sector. There are a lot of good banks out there, and many do not have big exposure to real estate. Look for regional banks paying fat dividends. Their share prices are depressed because of guilt by association. It’s a no brainer.
2. Homebuilding sector. You really need to be brave here, because this will take longer to recover, but real estate will recover. Again, look for companies who can hang on through this. They’ll be the ones left standing when all is said and done. Anderson likes Lennar (LEN), homebuilders who saw it coming and began reducing inventory and building cash long before anyone else felt the slide.
3. Short on oil.
“OK, this is really, really brave,” Anderson said. “Oil prices are out of line. Many believe we should be at $100 per barrel. The rest is due to speculation and a weak dollar. For this one, you have to be a contrarian. Don’t follow the crowd. If you believe oil prices will boomerang, a right guess could pay off handsomely. You can go short on oil by using an ETF (exchange traded fund) that employs that strategy.”
It could be a while before the bottom of this market decline is seen.
“The majority of our indicators suggest that more declines are needed to make the case for a market bottom,” said Stacey Wall, president & CEO of Pinnacle Trust. “This bear is still relatively shallow. The Dow Jones Industrial Average (DJIA) decline of about minus 20% has lasted 264 days as of this writing. The 33 bear markets since 1900 have sent the DJIA down by a median of minus 26.9% over 363 days. An imminent bottom would, however, be consistent with the median duration since 1980, which is 204 days. But the median drop since then has been minus 24%, again pointing to more selling ahead.”
To get clues about when this bear market end, Wall said they will be looking for a series of high-volume down days reflecting a waterfall decline, a selling climax and widespread evidence of capitulation, including market bottom levels reached by the vast majority of bottom watch indicators and new lows reached by the NASDAQ, EAFE and most non-U.S. indices.
“With a strong snapback in breadth, it would then be safe to start getting bullish again,” Wall said.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.
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