How to Invest in a Bear Market
Terri Spath, CFA, CFP®
At this point in 2022, we look back on what has been a broad sell-off for both stocks (as measured by the S&P 500) and bonds. The combined impact of the COVID-19 pandemic, supply-chain challenges, Russia’s invasion of Ukraine and a delayed central-bank response have resulted in low growth, inflation shocks and the risk of economic recession.
As investors have reassessed the outlook, the S&P 500 fell for most weeks during the first half of 2022 and slipped into a “bear market,” defined as a 20% decline from a peak. Simultaneously, these same factors pushed interest rates and credit risk up, pressuring bond prices down. While most stocks (and bonds) have recovered from their lows, investments are still deep in the red year-to-date.
Surveying the state of markets, we ask, “Is the next leg for stocks a move up or down? Is there any type of bond that can generate positive returns in this rising rate environment?”
As legendary investor Sir John Templeton observed, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Extremes in investors’ pessimism can be a contrarian indicator; when everyone throws in the towel, it can be a great time to buy. Further, when markets get pushed to the floor, there is a rebound effect and prices can jump back quickly (see chart).
In a bear (or bull) market, we use a disciplined process and strategy designed to guide, grow and guard wealth. This is how we do it: The Zuma Wealth investment philosophy lives at the intersection of fundamental “Warren Buffet” value investing and rules-based, trend following. The value lens selects asset classes and securities (stocks, bonds or ETFs) based on strong cash flows, financial fortitude and good value. Our quantitative overlay incorporates data to flexibly respond to market information and to guard against losses while confirming when to buy.
Based on our current guidelines, we have been and continue to be constructive on the consumer staples and energy sectors. The darling technology sector is approaching a “green light.” Bonds have been terrible all year, but after some false starts, we are keeping a close eye on high-yield corporate bonds. This is an asset class that has historically created productive returns when interest rates are rising.
While we do not like the current environment, we are not worried because we are confident that although this is a tough and scary time, discipline and strategy will guide our investment decisions through this challenging period. We are concerned, but the key is we are appropriately cautious.
In closing, investments take the stairs up and the elevator down; in other words, stocks are slower to rise than to fall. We ensure that investors get out fast when the elevator is going down and are in shape and ready to go when it is time to climb back up the stairs.
Terri Spath is the founder and Chief Investment Officer at Zuma Wealth, LLC. For more information, visit ZumaWealth.com.