Catalysts, Signs and Strategies for the Coming Bear Market Bottom
I recall while ascending the Disappointment Cleaver Route of Mt. Ranier in 2009, our rope team traversing a glacier heavily littered with boulders of all sizes. A picture of that slope was etched into my visual memory, a sign of treachery so convincing no verbal warning was required of the guides. What are the signs of a near-term bear market bottom, what catalysts may invoke these signs, and what bear market principles can guide you safely and profitably through such a perilous course?
On that side of the mountain, there was simply no way to the top of Ranier but across that terrifying, boulder-infested glacier. Likewise, major bear markets, like the one we’ve experienced throughout 2022, simply don’t end without one of two indicators triggering: either 1) the Fed reverses course and starts lowering interest rates, or 2) broad capitulation takes place in the stock market, or both. Jerome Powell has been clear about what will cause the Fed to reverse course: either a) financial crisis, or b) a fall in inflation near the Fed’s desired 2% level (likely accompanied by severe economic contraction). Broad stock market capitulation is driven by a lengthy and discouraging downtrend in stock prices (the traditional third and final stage of a bear market).
Rather than cower at the edge of the glacier until we freeze to death, let’s consider the navigational principles for investing through times of high inflation, recession, financial crisis, and falling stock prices.
Present high inflation requires a high value be placed on present income, and that future growth be scrutinized ruthlessly. If you’re high on the “hopium” of an early Fed pivot, and still sitting on a portfolio full of growth stocks, maximum pain likely lies ahead for you.
Build a watch list of great businesses, the ridiculous price at which you must own them, and set the alarm clock for when it happens.
Build investable cash. If you can’t take advantage of a great investment opportunity, it won’t benefit you. Get frugal, cut expenses, and reduce positions vulnerable to said conditions. If you don’t put food in your pack, you’re not going to the summit!
Buy great businesses when you find them at a reasonable price, but don’t meaningfully increase stock exposure until the bottom is confirmed. Many climbers made a summit attempt the day before they should have, never returning home as a result. Don’t jump the gun trying to time the bottom with a hunch, or the market will set you up, call your bluff, and eat your lunch.
Never sell merely to reduce emotional stress. Capitulating near a bear market bottom is a catastrophic error. Don’t get buried on the mountain!
Realize in the case of a Fed pivot, stocks have historically bottomed at significant new lows months after the Fed reverses course, and in the case of broad capitulation, a bottom comes quite swiftly once the selling exhausts itself. Remember that history rhymes, but it doesn’t exactly repeat. The bottom could be confirmed at any time. As an investor, you operate in the realm of probabilities, not assurances. Remain vigilant and nimble, ready to act decisively and courageously whenever that rare investing signal flashes; do not waver when the summit is in full view, and the conditions beg of you to attain it!
Think about it, and a blessed and happy New Year to you and yours. Shaun
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” ~Warren Buffet
“What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.” ~Ecclesiastes 1:9
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy assures success or protects against loss.
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