But a bear market isn't all bad news.

But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. 

In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence. 

By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.

Necessary Bears

Bear markets perform the necessary service of deflating values and sweeping the market clean of stocks that are weak and riding on fads alone. 

Your faith in solid fundamentals will usually pay off over time, but even a great company’s stock can get banged around in a tough market. 

The lesson here is that stocks, as illustrated by the Dow, are good long-term investments, but dangerous short-term bets.

Investment Mistakes in a Bear Market

Successful investing is not magic, just keep things simple and maybe follow few investing and money rules of thumb and you’ll be fine in the long run.

Investment Mistakes in a Bear Market

1.  Selling without any logical reasoning or attention to long-term goals.  Often they all miss the fact that they are selling at the bottom to only repurchase them back at the top. Stop selling without a reason, only sell if the fundamentals have changed for the long term or the investment does not fit in your plan, not because everyone else is selling in the market.

2.  The only worse thing one can do than selling out in a bear market is stop investing during the bear market.  Would you stop shopping if retail prices dropped 30%? No.   When you stop investing during a bear market you will miss out on many undervalued investment opportunities which can have great returns in the long run.

3.  Some investors start to look at alternative investments, (e.g. gold) because they believe somehow these will perform better than the equity markets.  Although alternative investments have their place in a portfolio the excessive focus during bear markets makes them dangerous.

4.  Just stop wasting your time and money trying to time the markets. Investors are more likely to time the markets during a bear market, as there are often big swings, which are seen as opportunities by investors, this strategy will only hurt your portfolio.

I know bear markets hurt, but you trying to “improve” things will only make things worse.  

• What were your investment mistakes during this bear market? 
• What have you learned from them?  
• Do you know anyone who made these mistakes?

The three bears scenario: how the bear market plays out if a recession occurs in 2022, 2023 or not at all.

In its “three bears” scenario, NDR lays out possibilities for how the bear market plays out if a recession occurs this year, next year, or not at all.

1.  If a recession occurs sometime in the second half of 2022, the stock market could drop another 10% or more. Bear markets that coincide with recessions tend to decline nearly 35% on average and last for 15.3 months. If this were to be the case, the sooner it would start, the sooner it would be over given that a bear market bottoms four months before a recession, setting the stage for a “shorter than average” recessionary bear market.

2.  If a recession occurs in 2023 that would make the current bear market twice as long as average, and likely lead to numerous bear-market rallies that eventually fail as they have in past instances. Clissold cites 1973, 1978, and 2000 as past bear markets that saw numerous rallies between their start and finish with a maximum gain of 15.9%, 14.3%, and 15.5%, respectively.

3.  The last and best scenario is if there is no recession at all. Stocks decline on average by 25% in a non-recessionary bear market over 9.1 months. In the past 50 years, the average decline has been 18% over 6.8 months.

If the Fed can achieve the delicate balance of taming inflation by slowing the economy without tipping the country into a recession, Clissold says, “the cyclical bear is likely close to being over.”

NDR = Ned Davis Research, an independent provider of global investment research based in Nokomis, Florida

How Do You Tell a Bear-Market Rally in Stocks From a New Bull Run? | Morningstar

Falling Prices can be a double-edged sword

Risk is more often in the price you pay than the stock itself.

Markets have fallen time and again because of some political or economic announcement.  Similarly, individual stocks and sectors often fall on weaker than expected earnings or unforeseen events.

During market sell-offs, the rapid decline of prices brought bargain issues that an investor could buy for a lot less than their pre-collapsed prices.

As others are selling in reaction to news reports, you can load up with value opportunities that can benefit from the subsequent price recoveries.  It is important to understand that the prices of solid companies with strong balance sheets and earnings usually recover.  If the fundamentals are sound, they always have and they always will.

From 1932 to today, the studies confirm that when bad things happen to good companies, they recover and usually quite nicely in a reasonable amount of time.  It has also been shown that high performance seems to beget lower returns, and low performance leads to higher returns in nearly all markets.  Today's worst stocks become tomorrow's best stocks and vice-versa.



Catching a falling knife

There is danger in trying to catch a falling knife, but even when stocks dropped 60% in one year, and bankruptcy and failure rates jumped fourfold, opportunities abounded.

Remember that one of the chief tenets of the value investing approach is to always maintain a margin of safety.  You can lessen the chances of buying a failure and increase your portfolio performance if you stick to the principle of margin of safety.  Don't try to catch an overpriced, cheaply made falling knife.

When stock prices fell after the bear markets, many investors were decimated.  On the other hand, value investor like Warren Buffett, was thrilled with all the bargains he found as a result of the collapse and said now was the time to invest in stocks and get rich.  The average investor and many professionals, having suffered through a bear market, wanted nothing to do with stocks and missed out on the chance to load up at these low prices.

You just had to catch the babies being thrown out with the bathwater.


Summary:

1.  Buying stocks that have fallen in price and yet still offer a margin of safety has resulted in successful investments.

2.  Although many find it difficult to leave their comfort zone and buy stocks that have fallen, those of us buying cheap stock realise that the bargains are found in the sales flyers and the new low lists, not in the highfliers (popular stocks) and the new high lists.





Examples:

Bear market of 1973 to 1975 Crash of the Nifty Fifty
The stock prices fell an average some 60% and many investors were decimated.  Warren Buffett in an interview with Forbes in November 1, 1974, described himself as feeling like an "oversexed guy in a harem".


1980s
Some of the large public utilities in US overcommit to nuclear power with disastrous financial results and fell into financial difficulty.  Many of them even had to file for bankruptcy to work out their difficulties.  After the Three Mile Island accident, the world interest in US nuclear power practically ground to a halt.  Few portfolio managers or individuals wanted to invest in these companies.  But those brave few who invested in Public Service New Hampshire, Gulf States Utilities, and New Mexico Power ended up with enormous returns over the balance of the decade as the  companies worked out their problems and returned to profitability.


Late 1980s and early 1990s
The fall of Drexel Burnham, the junk bond powerhouse and the implosion of the high-yield debt market, along with collapsing real estate prices, caused what is now know as the savings and loan crisis.  This crisis spread from the smaller S&Ls to the largest banks in the country.  Venerable institutions such as Bank of America and Chase Manhattan Bank fell to prices at or below their book value and had price-to-earnings ratios in the single digits.  Wells Fargo was hit particularly hard because it appeared to have significant exposure to a rapidly declining California real estate market.  Investors who did their homework and invested in banks during this time earned enormous returns over the decade that followed as the industry went through a merger boom that generously rewarded shareholders.  You just had to catch the babies being thrown out with the bathwater.


1992
After Bill Clinton took office, he appointed his wife Hillary to head a committee on health care reform that proposed a drastic program that would have dramatically, curtailed the profits of the pharmaceutical industry.  All the leading drug company stocks declined sharply.  Companies like Johnson & Johnson, fell to a level of just 12 times earnings.  Most investors shied away from the industry.  Investors who saw the opportunity in Johnson & Johnson realised that the stock was selling for the equivalent value of the consumer products side (Band-Aids and Tylenol) of the business.  You got the prescription pharmaceutical part of J&J for free.  Once Hillary care was a ded issue, the stock of J&J and the other pharmaceutical companies brought outsized gains to investors willing to take the plunge.


9/11 disaster
After the disaster of 9/11, American Express was viewed as being too dependent on air trael, and its shares fell from the ppprevious year's high of $55 to as low as $25.  Although American Express may have been facing some travel-related struggles, it was an enormously profitable company that sold at just 12 times earnings.  Investors who realized that companies of this quality are rarely this cheap and that the income stream from the credit card business offered a margin of safety have been amply rewarded in the years since.  American Express is another example of how catching the right falling knife can sharpen returns with high-quality stock at low prices.

Beware of chasing bear market rallies, strategists warn

PUBLISHED MON, MAR 30 2020
Nancy Hungerford


KEY POINTS

• Attributing the recent gains in equities and emerging market currencies to extraordinary monetary and fiscal stimulus measures, Eric Robertsen, head of global macro strategy at Standard Chartered, warned clients that the risk-rally lacks sustainability.
• “The full extent of the economic fallout is still unknown, and equity and credit markets still face considerable risks from earnings, downgrades and regulatory changes,” said Robertsen in a note.
• Daniel Gerard, senior multi-asset strategist from State Street, agreed that more information is needed from corporations before declaring a bottom. “No one has real insight yet into the impact into earnings, the fundamental drivers of markets here, that’s the next stage to come,” he said.

Investors in Asia are kicking off the new trading week with a note of caution, keeping an eye on volatility emanating from Wall Street.

Following the Dow’s biggest weekly rally since 1938, and the best performance for the S&P 500 and Nasdaq on the week since 2009, investors are debating whether U.S. markets have already bottomed or if more pain is in store.

Attributing the recent gains in equities and emerging market currencies to extraordinary monetary and fiscal stimulus measures, Eric Robertsen, head of global macro strategy at Standard Chartered, warned clients that the risk-rally lacks sustainability.


Consumer confidence hit

“The release of Q1 brokerage statements over the next month will coincide with the release of global economic data showing the depths of the economic collapse,” Robertsen explains in his weekly note. “We believe these two factors combined will exacerbate the weakness in consumer confidence, already under attack from the growing health crisis and the prospect of extensive unemployment.”

He pointed out that while the market declines have been well publicized, these first quarter statements will put “negative returns in black-and-white print” for retail investors. The losses incurred on traditionally safe investments will also hit home, Robertsen suggested, pointing to a recent 5% to 15% decline in exchange-traded funds tied to U.S. credit markets.

The full extent of the economic fallout is still unknown, and equity and credit markets still face considerable risks from earnings, downgrades and regulatory changes.

Investors are waiting on a deluge of economic data this week stateside that could fuel economic gloom. The focus will be on the weekly jobless claims due Thursday, after the prior report revealed a record 3.2 million in claims for the week that ended March 21. The monthly non-farm employment report is due Friday, but is expected to have less significance since the survey will not yet reflect the major shutdowns in the states most impacted by the virus.


Unknown risks

“The full extent of the economic fallout is still unknown, and equity and credit markets still face considerable risks from earnings, downgrades and regulatory changes,” Robertsen said. “For equities and credit, for example, we believe the hit to corporate profits will last longer than the immediate shock of the health crisis.”

No one has real insight yet into the impact into earnings, the fundamental drivers of markets here, that’s the next stage to come.

Addressing arguments that a 25% peak-to-trough drawdown has already priced in a worst-case scenario from these missing variables, Robertsen said: “We believe this sentiment is premature.”

Daniel Gerard, senior multi-asset strategist from State Street, agreed that more information is needed from corporations before declaring a bottom.

“No one has real insight yet into the impact into earnings, the fundamental drivers of markets here, that’s the next stage to come,” Gerard told CNBC’s Street Signs Asia. He credited central bank and fiscal stimulus measures with taking some of the fear out of the market and allowing participants to get back in.

However, he cautioned that this would not lead to a straight line higher from here.



No sign yet of a strong rebound

Vishnu Varathan, head of economics and strategy at Mizuho Bank, questioned if the stimulus-induced upside for risk assets has already run its course.

He predicted that revenue shocks from coronavirus-related containment measures, as well as supply-chain disruptions, would continue for the foreseeable future.

“The bad news could be seeping in, whereas the big bazookas are done with. The shock and awe of policy is about climaxing right now, and there is still not a good sign of a very strong rebound coming through,” Varathan told CNBC’s Street Signs Asia.

Robertsen looked back to the global financial crisis as a lesson in policy-induced rebounds. “Don’t forget that equities bounced in November 2008 when support measures were announced, before trading down to new lows in March 2009. Only then did the recovery begin.”


https://www.cnbc.com/2020/03/30/beware-of-chasing-bear-market-rallies-strategists-warn.html?fbclid=IwAR1sEiaZiQog6-V-SeTaPnTM74qSc2IbaOAOtIb5-_EzHP2cruiYslgyRFU

15 Very Safe Blue Chips To Buy During This Bear Market

Mar. 16, 2020


Summary

• The bear market so many have long feared is here. Stocks didn't just enter a bear market last week, they crashed into one with gusto.

• COVID-19 panic, combined with worst oil crash since the Financial Crisis, have combined to create a perfect storm of fear, literally the second highest in 30 years.

• However, regardless of when this bear market ends (and it surely will), great companies are always on sale, BUT especially when the market is panicking.

• CFR, UMBF, ADM, CAT, GD, PH, CNI, GWW, MDT, SWK, TJX, ROST, CB, ADP and APD are 15 very safe blue chips who have collectively delivered 15% CAGR returns over the last 23 years.

• From today's 25% undervaluation they could deliver about 17% CAGR long-term returns. Just don't forget to always use the right asset allocation for your needs, because when the bears roar on Wall Street, almost no stock is spared short-term pain.

1.  Why are global markets melting down over this?

Because while the COVID-19 Pandemic is indeed a global health crisis, what the market is worried about is the effect on earnings and the economy, both in the US and around the world.

US supply chains have been disrupted, with The Harvard Business Review estimating the end of March will represent peak supply chain disruption.

China's new cases have fallen below 40 per day over the last week (just 18 yesterday) and it's begun lifting travel restrictions, even in Wuhan where all this began.

By Q3 Goldman expects supply chains to be back up and running. By Q4 all COVID-19 effects are expected to reverse, resulting in 4+% GDP growth in 2020.


2.  Does that mean the market is 100% wrong to dive into a bear market? 

No, because the combined effects of the pandemic + oil crash are expected to hurt earnings significantly.





3.  Goldman expects S&P 500 earnings to fall 5% this year due to the pandemic. 

The big hit will come in Q2 and Q3, and then a strong recovery in Q4.

Goldman is forecasting a 27% bear market, that would be relatively short and mild. It expects a market bottom by the middle of the year and then a 31% rally to close the year about -2% for stocks.

That's not necessarily an outlandish forecast, given that the average non-recessionary bear market since 1945 has been a 24% decline.

Goldman Sachs just put out a new research note which states

• it expects -5% EPS growth for the S&P 500 this year (about $156.75)
• it expects the S&P 500 to bottom at 2,450 in the middle of the year
• 2450 on S&P 500 represents a 15% decline from today's levels
• it represents a forward PE of 15.6 vs 16.3 25-year average (about 4% undervalued)

Goldman expects earnings growth to "collapse" in the second and third quarters of 2020 before rebounding through the end of the year and into 2021. The S&P 500 will bottom out at 2,450 in the middle of the year, roughly 15% lower than its current level, the analysts projected. The fresh low will give way to a fourth-quarter surge and push the benchmark index to 3,200 by the end of 2020, they added." - Business Insider



4.  Of course, the big question is whether or not we get a recession this year.

Jeff Miller and Moody's both estimate about 50% probability of a short and mild recession this year.

For next year the bond market/Cleveland Fed/Haver analytics model estimate about 21% chance of recession.

The bond market is potentially so nonchalant about next year's recession risk because it's now pricing in a near 100% probability of a rate cut to zero on March 19th (Fed meetings last two days).

Moody's estimates that each 25 bp rate cut stimulates economic growth by 0.1% to 0.15% within a year. The Fed will have made the equivalent of 7 rate cuts within two weeks, potential boosting growth by as much as 1% for 2021.

The Fed is also injecting at least $1.5 trillion into the repo market and resuming QE, all to ensure ample liquidity to prevent a repeat of the financial crisis.

So this is the good news. The bad news is that until now and the end of the year we have to deal with the second-highest market volatility in modern history.




5.  Why are some people so worried that this historically mild bear market might become a raging inferno of paper wealth destruction?


Because low oil prices could trigger a wave of bankruptcies in that sector among highly leveraged junk bond rated companies. You can see that until just recently, investment-grade bond yields have been tracking 10-year yields lower. Junk bond yields have been rising throughout this crisis, as bond investors demand extremely high risk-premiums to buy high-risk bonds.

COVID-19 on its own is likely only capable of generating a short and mild recession, similar to the Gulf War oil shock recession of 1990, which lasted eight months and caused a 20% bear market.

BUT the potential is there for cascading loan defaults to trigger significant financial losses for bond investors, banks, and anyone holding high-yield debt.




6.  The Fed's Emergency Rate Cut

The Fed's emergency rate cut (the first since 2008) was NOT meant to cause stocks to go up, as so many think. Rather it was meant to reduce short-term borrowing costs, which are mostly based on LIBOR, which you can see tracks the Fed Funds rate relatively closely.

Along with the Fed's repo short-term and QE long-term bond-buying, which is designed to ensure sufficient liquidity in the financial system, the Fed is just trying to grease the wheels of the financial system.

The goal is to either

• ameliorate the effects of the economic slowdown, or,
• if we get a recession, maximize the chances of it being brief, and a recovery being strong and beginning as soon as possible.

7.  Bargains galore for blue chip dividend investors

So how long with the COVID-19 pandemic and bear market last?

In the meantime, there are bargains galore for blue chip dividend investors to cash in on.

There has always been volatility in the stock market and there always will be. That’s guaranteed as long as humans are the ones making buy and sell decisions.

In the short-term, the reasons for market sell-offs feel like they matter a lot. In the long-term, investors tend to forget the specific reasons stocks fell in the past.

In the short-term, market downturns feel like they will never end. In the long-term, all corrections look like buying opportunities.

Regardless of how long this correction lasts, to win in the stock market over the long haul you must be willing to lose over the short-term." -Ben Carlson (emphasis added)

8.  15 Very Safe Blue Chips To Consider During This Bear Market

Dividends are a function of share count, not price.

However, given the rapidly changing nature of the COVID-19 pandemic as well as significant economic/earnings uncertainty, for this article, I wanted to highlight companies with

9/11 blue chip quality
5/5 dividend safety
trading at fair value or better

These 15 blue chips are

• Cullen/Frost Bankers (CFR)
• UMB Financial (UMBF)
• Archer-Daniels-Midland (ADM)
• Caterpillar (CAT)
• General Dynamics (GD)
• Parker-Hannifin (PH)
• Canadian National Railway (CNI)
• W.W. Grainger (GWW)
• Medtronic (MDT)
• Stanley Black & Decker (SWK)
• TJX Companies (TJX)
• Ross Stores (ROST)
• Chubb Limited (CB)
• Automatic Data Processing (ADP)
• Air Products & Chemicals (APD)

Fundamental Stats On These 15 Companies

• average quality: 9.9/11 blue chip quality vs. 9.7 average dividend aristocrat and 7.0 average S&P 500 company
• average dividend safety: 5/5 very safe vs 4.7 average aristocrat and 3.0 S&P 500 average
• average yield: 2.9% vs. 2.3% S&P 500 and 2.7% most dividend growth ETFs
• average valuation: 23% undervalued vs fairly valued S&P 500
• average dividend growth streak: 35.7= dividend aristocrat/champion
• average 5-year dividend growth rate: 10.3% CAGR
• average analyst long-term growth consensus: 9.0% CAGR vs. 6.3% S&P since 2000
• average forward PE ratio: 13.6 vs 13.7 S&P 500 bottom on December 24th, 2018
• average PEG ratio: 1.51 vs. 1.69 S&P 500
• average return on capital: 58% = 84th industry percentile (very high-quality by Greenblatt's definition)
• average 13-year median ROC: 65% (relative stable moats/quality)
• average 5-year ROC trend: +6% CAGR (relative stable moats/quality )
• average credit rating: A (investment grade, very-high quality)
• average annual volatility: 24% vs. 15% S&P 500, 26% Master List Average, 22% average aristocrat
• average market cap: $38 billion
• average 5-year total return potential: 2.9% yield + 9.0% growth +5.4% CAGR valuation boost = 17.3% CAGR (12% to 22% CAGR with 25% margin of error)

Collectively these this is a group of dividend aristocrats, with a nearly 36-year dividend growth streak, A-rated balance sheet and returns on capital that are in the top 16% of their respective industries and growing over time.

In other words, just the kind of sleep well at night blue chips you can safely buy when bear market choppy waters are upsetting most investors.

9.  Risk management is the most important part of long-term investing success.

These are the risk management rules I use for all the portfolios I manage including my own. They are merely guidelines to start thinking about the best way to build a sleep well at night bunker portfolio for all market conditions, including bear markets such as this one.

10.  Consider Nibbling Today

Bottom Line: No One Knows Where The Bottom Of Any Bear Market Is So Consider Nibbling On These 15 Safe Blue Chips Today

Here's Ritholtz Wealth Management's CEO, Joshua Brown with what he's telling his clients about market timing right now.

Why don’t we just sell everything and wait this out? Get back in when the dust settles?”

The great answer is that you won’t know when the dust settles. There’s no airplane writing the “all clear” in the sky above your neighborhood. And when the dust settles, do you think stocks will be at their lows? Or will they have already rallied furiously, in anticipation of this? Let me give you an example.

Today is March 9th. Precisely eleven years ago today, in 2009, the stock market stopped going down. There was no reason. The dust had settled, without fanfare or any sort of official announcement. If you had polled people that day, or week or even month, most would not have agreed that we had seen the worst.

The economic headlines were not improving. But there it was. And by June 1st, less than 3 months later, the stock market had climbed 41% from that March low. And even with that having happened, the majority of participants still weren’t clear that the dust had fully settled. That we had, in fact, seen the worst.

There were still people calling us 3, 5 and 7 years later who had gone to cash and still hadn’t gotten back into stocks. They missed a new record-high a few years later and hundreds of percentage points in compounding on their assets." - Joshua Brown, CEO Ritholtz Wealth Management (emphasis added)

Don't get me wrong, I don't know where the bottom of this bear market is, given the factors that are hurting the global economy and corporate earnings right now.

All I do know is that great companies are on sale. I also know that the market, when it becomes excessively fearful becomes very wrong about the intrinsic value of companies.

The prices you see on your screen today are the transitory manic depressive opinions of the often mentally unstable Mr. Market. (If I have offended Mr. Market, my apologies). Mr. Market did not carefully value your companies today and decided that they are now worth less. No, he woke up in a grumpy mood and indiscriminately marked them down as if they were overripe bananas at the grocery store. (You cannot have enough metaphors here.)

The stock prices on your screen say nothing about what these companies are worth. Nothing at all. But that is all that is going to matter in the long run. I promise you one thing: The value of your companies doesn’t change 8% a day, day after day."- Vitaliy Katsenelson, CEO of asset management firm IMA (emphasis added)

CFR, UMBF, ADM, CAT, GD, PH, CNI, GWW, MDT, SWK, TJX, ROST, CB, ADP, and APD represent blue chip quality dividend growth stocks with 5/5 very safe dividends that have bright futures ahead of them.

They might not necessarily have a great 2020, but good long-term investing requires looking beyond one or two bad years and looking at the likeliest long-term growth potential.

11.  Luck is when preparation meets Opportunity

(Source: AZ Quotes)

By no means am I saying anyone should go "all in" to any stock all at once. That's market timing, and numerous articles I've shown why that doesn't work for regular investors.

I never buy at the bottom and I always sell too soon." ~ Baron Nathan Rothschild

I'm a big advocate of buying in stages, nibbling rather than chomping on quality companies at reasonable to attractive valuations.

Where once many of the world's best dividend stocks were overvalued, today you can buy the kind of quality bargains only available in a market panic.

No one rings a bell at the top or the bottom. And 80% of the market's best days come within two weeks of its worst.

According to Bank of America, 99.6% of long-term returns over the last 90 years have come from just the 90 best market days.

So as Buffett famously said, "be greedy when others are fearful" because some of these fantastic quality bargains won't last long.

Whether the market bottoms tomorrow, in mid-2020 or the end of the year, I'm confident that anyone buying these companies today, as part of a diversified, and prudently risk-managed portfolio, will be very pleased with the results in 5+ years.

https://seekingalpha.com/article/4332110-15-safe-blue-chips-to-buy-during-this-bear-market

The Three Fundamental Truths of a Bear Market

The three fundamental truths of a bear market.

1.) A bear market is only bad if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friends of the long-term investor.
3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.



So what do I do with my money in a bear market?

The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused Gillette's stock price to fall 30%, people are still going to buy razors. The basics of the business haven't changed.

When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store... load up on it while you can, because before long, the prices will go back up to normal levels.

What is a bear market and what causes them?

By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market. This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation [i.e., stocks were way too expensive and needed to fall to more reasonable levels]. Investors who are scared by these lower earnings or lofty valuations sell their stock - causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well... and the vicious cycle begins.

One of the best examples of such an unfriendly market is the 1970's, when stocks went sideways for well over a decade. Experiences such as these are generally what scare would-be investors away from investing [which, ironically, keeps the bear market alive... since there are no buyers purchasing investments, the selling continues.]


How do they affect my investments?

Generally, a bear market will cause the securities you already own to become undervalued. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: What you already own is worth less [according to the market.]


This leads to two fundamental truths:
1.) A bear market is only bad if you plan on selling your stock or need your money immediately.
2.) Falling stock prices and depressed markets are the friends of the long-term investor.

In other words, if you invest with the intent to hold your investments for years down the road, a bear market is a great opportunity to buy. [It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?]


So what do I do with my money in a bear market?

The first thing you need to do is to look for companies and funds that are going to be fine ten or twenty years down the road. If the market crashed tomorrow and caused Gillette's stock price to fall 30%, people are still going to buy razors. The basics of the business haven't changed.


This proves the third fundamental truth of the market:
3.) You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.
When you understand this, you will see falling stock markets like a clearance sale at your favorite furniture store... load up on it while you can, because before long, the prices will go back up to normal levels.




Additional notes:

Fear Index

What are you doing with your money?

-  I'm buying stocks while they are cheap.
-  I'm staying put in the market for the long-term.
-  I'm taking some money out of stocks. I don't want to risk everything.
-  I'm selling all stocks and moving to CDs.
-  I'm in a panic. Where's the nearest mattress?

Bull Market – Bear Market

1.  Bull Market and Bear Market. What do they mean?

(a)  What is a bull market?

A bull market is defined by steadily rising prices. 

The economy is thriving and companies are generally making a profit.

Most investors feel that this trend will continue for some time.


(b)  What is a bear market?

By contrast a bear market is one where prices are dropping. 

The economy is probably in a decline and many companies are experiencing difficulties.

Now the investors are pessimistic about the future profitability of the stock market.

Since investors’ attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.



2.  Investing in a bull market

In a bull market the investor hopes to buy early and hold the stock until it has reached it’s high.

Obviously predicting the low and high is impossible. 

Since most investors are “bullish” they make more money in the rising bull market.

They are willing to invest more money as the stock is rising and realize more profit.



3.  Investing in a bear market

Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight.

An investment strategy in this case might be short selling. 

Short selling is selling a stock that you don’t own.

You can make arrangements with your broker to do this.

You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped.

You will profit from the difference in the two prices. 

Another strategy for a bear market would be buying defensive stocks. 

These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.

Small losses versus Big losses. They are different stories.

Small Losses

Small hits or losses are alright, so long as they aren't persistent or don't last forever.  That said, we cannot take 10% or even 5%, losses ongoing and forever.  Even if we under-perform the markets by a few percentage points, we can lose out on considerable gains once the power of compounding sets in.


Big Losses

Big losses are a different story.  We can tolerate the 10% corrections and even ignore the 10% twitter, but if we are exposing ourselves to 50% losses on individual investments - or worse, on substantial portions of our portfolios - look out!  It will take a lot to turn that ship around and get it back to where it went off course.


Fluctuations, minor corrections and bear market

There is a big difference between fluctuations, minor corrections (considered to be 10% pullbacks by most market professions), and an all-out bear market, usually considered a plunge of 20% or more.  The prudent investor senses the difference between fluctuations, corrections and the more destructive bear markets.


The high cost of an untimely hit.

Volatility can be expensive, especially, if it goes beyond normal investment noise into creating a significant downturn, especially at the beginning of an investing period.

The principles and effects of compounding makes a difference not just how much we succeed but also WHEN we succeed in the markets.

The general principle is that the more we can earn SOONER - to unleash the power of compounding to a greater degree over a longer time - the better off we are.

Conversely, if our investment capital takes a hit in the early going, it takes a lot just to get back to even, let along to get ahead.

A Horrifying Storm Is Brewing Inside the Stock Market

A Horrifying Storm Is Brewing Inside the Stock Market

The markets continue to hover around record highs. But there could be a storm brewing investors need to watch.

MoneyShow.com
Aug 8, 2018


Don't forget risk.

Leverage remains insanely high at $647 billion, 55% higher than at the 2007 double housing and stock bubble peak and 116% higher than the 2000 tech mania peak. Total margin debt has exceeded 3% of Gross Domestic Product only three times; in 1929 as the madness of the Roaring Twenties peaked, last year and this year.

Leverage may seem like magic on the way up but the effects are horrifying when prices fall. The unwinding of margin debt between 1929-1932 resulted in a economic depression as the phenomenal wealth driving the nation's economy evaporated.

Stock prices fell as much as 90% after soaring 4.2-fold in only nine years and four months. The damage was so extensive that the Dow Industrials did not fully recover until 26 years later in 1955.

Thus, we look at today's stock market and worry about the similarities. In only nine years and four months from the previous bear market bottom in March 2009, the Dow Jones Industrial Average has now surged 4.1-fold, almost exactly the same as the run into the 1929 peak.

While we do not expect an exact repeat of the 1929-32 period when excessive leverage led to a crash and a collapse into an economic depression, the current environment is way too similar to past manias and in certain aspects — primarily leverage — is far worse than the prior two peaks in March 2000 and October 2007. Given our long term target of Dow 14,719, down 43% from today, we have zero comfort for the long side.

Meanwhile, total dollar trading volume (DTV) now stands at yet another new record high. Over the last 12 months, total DTV is now $81.24 trillion, up nearly 15% from last years record, roughly 75% higher than at the 2007 double bubble peak and 150% higher than at the tech mania peak.

The trend to trade more has kept average holding periods for U.S. stocks to just over four months. When stocks are held for the long term, valuation becomes a primary consideration. The shorter period one holds stocks, the less likely one is to rely on valuations, hence valuation methodologies are now routinely shunned and scorned in favor of chasing momentum.

Sentiment is perhaps the most significant driver of price, but it is not mere excessive optimism that makes the current environment so dangerous. Excessive valuations have been in place for so long that they are now accepted as entirely normal.

In the same way that buying stocks for 10% down in 1929 was regarded as normal, in the same way the "Nifty Fifty" one decision stocks in 1972 were considered normal, in the same way Nasdaq at a 250 P/E multiple in 2000 was considered normal, today's environment is accepted as normal and forecasts of higher prices abound.

In a CNBC survey of 19 top Wall Street firms, every strategist forecast higher prices and an average gain of another 10.6% through the remainder of the year. We are far more comfortable on the other side of the fence. Risks on the long side continue to be insanely high.

History has shown 30% downturns occur on average, roughly once every nine years. We are astonished how little attention is paid to risk parameters, even at this point when it is so ridiculously obvious how much leverage is built into stock prices and how overvalued stocks are.

We expect as bear market and our target remains Dow 14,719. Be careful. A storm is brewing.

By: Alan Newman, editor of CrossCurrents. Via MoneyShow.



https://finance.yahoo.com/m/79fb3e52-7b6f-3489-a678-e0731fb8b644/a-horrifying-storm-is-brewing.html

The stock market is officially in a correction... here's what usually happens next

The stock market is officially in a correction... here's what usually happens next

"The average bull market 'correction' is 13 percent over four months and takes just four months to recover," Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer said in a Jan. 29 report.

But the pain lasts for 22 months on average if the S&P falls at least 20 percent from its record high — past 2,298 — into bear market territory, the report said. The average decline is 30 percent for bear markets.

The last week of stock market drops has taken the S&P 500 into correction territory for the first time in two years.


The S&P 500 fell officially into correction territory on Thursday, down more than 10 percent from its record reached in January.

If this is just a run-of-the-mill correction, then we are looking at another four months of pain, history shows. If the losses deepen into a bear market (down 20 percent), then it could be 22 months before we revisit these highs, history shows.

"The average bull market 'correction' is 13 percent over four months and takes just four months to recover," Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer said in a Jan. 29 report.



Source: Goldman Sachs

But the pain lasts nearly two years on average if the S&P falls at least 20 percent from its record high — past 2,298 — into bear market territory, the report said. The average decline in a bear market is 30 percent, according to Goldman.



The last week of stock market drops has taken the S&P 500 into correction territory for the first time in two years

Stocks remain in an upward bull market trend, the second longest in history.

S&P 500 corrections and bear markets since WWI



Source: Goldman Sachs

Evelyn Cheng CNBC



https://www.cnbc.com/2018/02/08/the-stock-market-is-officially-in-a-correction--heres-what-usually-happens-next.html?__source=Facebook%7Cmain

A sound mental approach towards stock fluctuations (5): Market Declines and Unsuccessful Stock Investments

Market declines and unsuccessful stock investments

In the case of market declines and unsuccessful stock investments, there is a vital difference here between temporary and permanent influences.

The price decline is of no real importance:

• unless it is either very substantial - say, more than a third from cost - or 
• unless it reflects a known deterioration of consequence in the company's position.

In a well-defined bear market, many sound common stocks sell TEMPORARILY at extraordinarily low prices. 

It is possible that the investor may then have a paper loss of fully 50% on some of his holdings, without any convincing indication that the underlying values have been permanently affected.



The Price can be Extraordinary in a Recession or Bear Market

In the business recession and bear market in the past, there were times, an outstanding business was considered in the stock market to be worth less than its current assets alone - which means less as a going concern than if it were liquidated.  That price was extraordinary.

Why?  The reasons maybe many.  

• The reasons were justified in some.   
• Yet, in some, the reasons were exaggerated and eventually groundless fear; 
• while others were typical of temporary influences.

An example:  

An investor bought ABC in 1987 at say, 12 times its five-year average earnings or about 80.  The share price declined to 36 soon after. 

What was the implication of the share price to him?  

• We cannot assert that the decline to 36 was of no importance to the investor.  
• The investor would have been well advised to scrutinise the picture with some care, to see whether he had made any miscalculations.  

But if the results of his study were reassuring - as they should have been - he was 

• entitled to disregard the market decline as a temporary vagary of finance, and,
• unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.

US Stocks - 1926 - 2014

The Danger of getting out of stocks during the Bear Market.

Reactions to turbulent and bear markets vary by investor. 

Some are unfazed by large drops in stock prices, and even view them as buying opportunities (“Buffett-like investors”). 

Others curtail their stock holdings when the market incurs a steep drop, but don’t completely pull out of stocks (“nervous investors”). 

There also are many who get out of stocks completely during a bear market (“panic investors”) out of fear of incurring further losses.




Given wide variances in how each investor reacts to bear markets— the aggregate data does imply, however, that Buffett-like investors are likely a comparatively small group. More people probably fall into the nervous and panic investor groups. This is not surprising, given the human inclination to be risk-averse. 

As Daniel Kahneman and Amos Tversky demonstrated with “prospect theory,” we feel the pain of losses much more than we derive pleasure from gains. 

Compounding matters, we humans commonly engage in hyperbolic discounting, which means we place greater value on rewards received sooner rather than later. 

When the market falls and stocks are sold, we see the immediate value of avoiding further losses. 

What isn’t considered are the potential future gains forfeited by not continuing to stick with stocks or, better yet, by rebalancing and allocating more money into stocks.

Rebalancing: A Better Method

If panicking is a big problem, a strategy that helps an investor to maintain a constant exposure to stocks should logically produce benefits. While some may view the best advice as simply being “don’t panic and stay allocated to stocks,” such guidance only works well for Buffett-like investors. All other investors need a strategy that gives them a sense of control. This is where rebalancing comes into play.

Rebalancing is the process of adjusting your portfolio back to your targeted allocation. For example, say your allocation calls for a 70% allocation to stocks and a 30% allocation to bonds. After a bad year for equities, your portfolio’s allocation changes to 60% stocks and 40% bonds. Rebalancing would prompt you to shift 10% of portfolio dollars out your bond holdings and into stocks, bringing your portfolio back in line with your targets.

Rebalancing is a buy low/sell high strategy—the opposite of what many investors actually do. It prompts you to buy assets after they have fallen in price. This may sound counterintuitive and may even be difficult to do the first time you try to employ it. Yet its bear market benefits may convince you of its value. Rebalancing lessens the blow of bear markets, making it easier to stick with stocks. In addition, rebalancing restores a sense of control. Rather than being left wondering what the best decision is for your portfolio based on what the pundits are saying about market direction, you have a strategy that prompts you to act and gives direction on how to do it.

http://www.aaii.com/journal/article2/the-danger-of-getting-out-of-stocks-during-bear-markets?viewall=true

Cyclical losses from economic cycles, time horizon and retirement planning

The value of assets such as stocks and real estate increases on average over the long run.

It also tends to fluctuate in waves - it will go up for a while, then down a little, then up some more and down again.

If you are not careful these waves can make you seasick, metaphorically speaking, of course.

If you watch these cycles happen but aren't aware of how to manage your response, you could find yourself making poor financial decisions as a result or even attempting to retire shortly after a devastating economic collapse, as happened to many people after the 2008 financial collapse.

What are the ways to prevent this from happening?




YOUR TIME HORIZON AND ECONOMIC CYCLES

The main thing to consider is your time horizon - the number of years you have remaining before your planned retirement date.

When you are young and first begin saving for retirement, it is easy to take a lot of risk without worrying about CYCLICAL LOSSES, because you think you will have more than enough time to regain that value.

This is a mistake a lot of people make, as they sell all their investments when the economy crashes, forgetting that economies eventually recover.

A recession is the worst time to sell your investments because you will get the worst possible price for them, for the reason of a national economic cycle rather than anything inherent to the investments themselves.



DON'T CONFUSE ECONOMIC CYCLES WITH TROUBLED INVESTMENTS

It is important, however, that you don't confuse economic cycles with troubled investments.

If your investments are doing poorly in a strong economy, consistently underperform or otherwise give you a reason to believe that the price won't recover, then don't stay on a sinking ship - sell those investments and buy something better.

Losses resulting from economic cycles, such as recessions, will recover; so remain persistent.

After you get some practice and become familiar with these cycles, you can even sell your investments just as they begin and then rebuy them when they lose a lot of their value, maximizing your wealth.

Another approach is then to sell them again slowly as their price recovers.

This reduces some of the risk associated with the economy's uncertain movements - something which so many people struggle to predict, even experts.

If you know how to ride these cyclical waves in the economy, you can actually use them to your advantage, but even if you just hold onto your investments and wait out the recession, you will regain the value eventually.



FINANCIAL PLANNING NEARING RETIREMENT

These cycles only really pose a risk to people who are getting ready to retire in the middle of one.

This is why you should absolutely manage a shift in the types of investment you hold as you get closer to your retirement.

When you are young, more volatile investments like equity index funds will give you the highest growth rates, even though the price roller coaster may make you dizzy.

As you get closer to your retirement date, the timing of these cycles can be very unfortunate, leaving you with little money to fund your retirement; so over the years you should gradually switch from high-risk to low-risk investments.

This means that you should regularly increase the percentage of your total investments that are allocated to things like low-risk bonds, fixed-rate annuities or even high-yield bank accounts.

That way, by the time you are ready to retire, the fluctuations in the economy will have little influence on the value of your investments.

This process of gradual risk reduction will help to give you the highest returns on your investments, while carefully managing the amount of risk to which you are exposed.

Market Sentiment

Market sentiment is the general prevailing attitude of investors as to anticipated price development in a market.  This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events.

For example, if investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme.  Very bearish sentiment is usually followed by the market going up more than normal, and vice versa.

Mutual fund flows are very useful.

Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of overall movement of an individual stock has been attributed to market sentiment. The stock market's demonstration of the situation is often described as all boats float or sink with the tide, in the popular Wall Street phrase "the trend is your friend".

In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors. Market sentiment, as such, might be acquired from more than one sentiment analytical tool. For example, there could be just simple extraction of movement on stock exchange and validly called market sentiment. Another tool is to extract the news and media information based on their polarity. Yet another sub-subject might be community sentiment about the market movements (blogs, forums).

The Acertus Market Sentiment Indicator (AMSI) is one indicator of market sentiment. AMSI incorporates five variables. In descending order of weight in the indicator they are 

-  Price/Earnings Ratio, a measure of stock market valuations; 

-  price momentum, a measure of market psychology; 

-  Realized Volatility, a measure of recent historical risk; 

-  High Yield Bond Returns, a measure of credit risk; and 

-  the TED Spread, a measure of systemic financial risk. 

Each of these factors provides a measure of market sentiment through a unique lens, and together they may offer a more robust indicator of market sentiment.

Additional indicators exist to measure the sentiment specifically of retail Forex market investors. Though the Forex market is decentralized (not traded on a central exchange),  various retail Forex brokerage firms publish positioning ratios (similar to the Put/Call ratio) and other data regarding their own clients' trading behavior.  Since most retail currency traders are unsuccessful,  measures of Forex market sentiment are typically used as contrarian indicators.

http://en.wikipedia.org/wiki/Market_sentiment