Money For the Rest of Us: How to Survive a Bear Market
Investors have been lulled by easy money in the past decade. The stock market had its longest upward run from 2009 to 2020. And even the selloff at the start of Covid barely hit bear market territory before recovering.
Most traders today might now overlook the fact that bear markets tend to be far more common. Even 10 percent corrections used to occur closer to once a year on average.
And a 20 percent pullback denoting an official bear market used to occur every 2-3 years. Historically, bear markets drop about 30 percent on average before a recovery. That suggests there may be a bit more downside in the coming months.
This current bear market is being driven by two factors. The first is rapidly-rising interest rates, similar to how the Federal Reserve acted in the early 1990s. The second is high inflation, much like conditions in the late 1970s.
Stocks are selling off as high inflation lowers certainty over a company’s earnings. That’s why growth stocks are getting hid harder than value stocks right now. And higher interest rates mean a higher cost of capital. That will hit more leveraged companies harder as well.
Investors should look to put cash to work in value stocks, industry leaders, and dividend paying opportunities in a bear market. And understand that bear markets end in time, with a new rally and new highs in time.