Bear Market low

Bear Market Lessons


I hate to bring you back to a scary time, but seven years ago this week; U.S. stock markets plunged to their worst levels of the entire bear market 0f 2008-2009. Although the entire financial system almost went over the cliff in September and October of 2008, it wasn’t until March 9, 2009 that stocks hit rock bottom. On that day, the Dow closed at 6547; the S&P 500 fell to 676; and the NASDAQ was at 1268. Thankfully, markets have charged higher since those dark days, but with recent volatility and market corrections, now seems like a perfect time to review those painful bear market lessons.

1. If want to take the ride, you have to prepare for ups and downs. The first time I went on the Dragon Coaster at Rye Playland, I learned this lesson, but that ride lasted just about two minutes. Unfortunately, the investor roller coaster spans a lifetime. If you plan to own securities to fund future obligations, you must accept that bear markets are part of the process. The good news is that not all bear markets are as awful as the last one, which was the most severe since the 1930’s.

2. Bear Markets are GOOD for long-term investors. Plunging markets are tough on the nerves, but if you are still saving for retirement or college, take solace in the fact that you are buying shares, which will eventually be seen as being on sale. As Warren Buffett once said, “Prospective purchasers [of stocks] should much prefer sinking prices.”

3. Borrowing can be dangerous. Whether it’s a house or a dot-com stock, one lesson is just because some bank/investment company is willing to lend you a lot of money, does not mean that you should take it. Too much leverage can be a scary thing, both for individuals and for companies. That’s why some basic rules of thumb exist—to keep us out of trouble!

For example, putting down a 20 percent down payment for a house is prudent, because just in case the housing market collapses, you have more built-inequity. A corollary of the debt warning is to read the fine print on all documents. There were too many instances when borrowers really did not understand the terms of the loans that they were assuming. Although many regulations now require more transparency and disclosure, we must be vigilant in reviewing documents to protect ourselves.

4. Emotions are your enemy. There's no better event to learn the lesson of how investor fear can lead you astray than the recent bear market. From the beginning stages in 2008 through the bear market low and then for months – even years – later, many investors wanted to sell everything and hide under the bed. That was an understandable feeling-it really was scary!

The big problem with selling when conditions are grim is that very few investors have the wherewithal to get back into the fray. When they do, it is usually long after markets have clawed their way back up. Acting on fear often ends up prompting you to sell low, buy high and take unnecessary overall losses in your portfolio.

5. Cash is King. Those who entered the financial crisis and ensuing bear market with a safety net (6 to 12 months of expenses and up to two years for retirees) were aptly rewarded. The bear can come at any time and if you had ample emergency reserves, you were able to refrain from selling assets at the wrong time and/or from invading retirement accounts.

Will Stock Correction Lead to Bear Market?


The first two weeks of the year have been the worst ever for US stock indexes. Indexes are now in correction territory for the second time in six months and the big swings are testing every investor’s internal fortitude and begging the question: will the correction lead to the first bear market in nearly seven years? Understandably, this period may cause a bit of déjà vu all over again, but the current situation is not like 2008 for many reasons. The first of which is that there is no financial crisis brewing and the second is that US economy, while not strong, is still growing by about 2-2.5 percent annually. Although some investors may be tempted to sell, they do so at their own peril. Market timing requires you to make two precise decisions, when to sell and then when to buy back in, something that is nearly impossible. The data show that when investors react, they generally make the wrong decision, which explains why the average investor has earned half of what they would have earned by buying and holding an S&P index fund.

The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you’re a long-term investor, who doesn’t have all of your eggs in one basket. Try to adhere to a diversified portfolio strategy, based on your goals, risk tolerance and time horizon -- one that is not reactive to short-term market conditions, because over the long term, it works. It’s not easy to do, but sometimes the best action is NO ACTION.

Where the markets will go throughout the rest of 2016 depends on the answer to the following six questions:

1) Will Chinese growth accelerate? The cause of the early part of the New Year's sell-off was anxiety over a slowdown in China (sometimes referred to as a “hard landing”), which sent stocks there into a bear market, down 20 percent since the December high. This is not a new fear—investors have believed that a downshift in growth in the world’s second largest economy would inflict pain on the rest of the world, especially as China shifts from an economy that relies on government investment in building and infrastructure as well as manufacturing to one that is more consumer-based.

2) How many Fed Rate increases? The central bank pledged to raise rates gradually—according to its own projections, there are likely to be four quarter-point increases in 2016. But the bond market thinks that there will only be two, due to slower growth. If the Fed is correct, it would mean that US growth continues to accelerate and that inflation will rise towards the target 2 percent; if the bond market is correct, growth and inflation will likely stall in 2016.

3) Will crude oil steady/fall further/rise? Oil’s shaky start (down about 20 percent in the first two weeks of the year), comes after last year’s 30 percent drop and 2014’s 46 percent plunge. Crude is now down over 70 percent over the past 18 months. With Chinese demand cooling and supply remaining high -- the world is producing 1 million barrels of oil more than it’s consuming, which is pushing prices down. That’s good news for consumers, who will either save or spend the savings at the pumps, but bad news for energy companies, whose earnings are going to get shellacked.

4) Will US Economic Growth Accelerate? GDP growth last year is likely to come in around 2.25 percent, matching the results of the previous three years. Analysts are expecting growth of 2.5 percent in 2016, with some thinking that a recession is imminent. Part of the answer to this question may also be found in the movement of the US dollar, which in trade-weighted terms, is close to a ten-year high. With anxiety in China and emerging markets pushing capital to the US, the dollar could continue to rise, which would be bad news for US manufacturers and likely keep inflation too low in the eyes of the Federal Reserve.

5) Will Wages Finally Rise? The economy added 2.65 million jobs in 2015, the second best year for job creation in the past 15 years. (The best was 2014). While there was progress on job creation and the unemployment rate (5 percent), wage growth has lagged. With a tightening labor market, employers may have to dig deep and pay up to attract and retain qualified talent. That would be good news for workers, but not so hot for corporate America.

6) Will the Bear Emerge? The current bull market in US stocks turns seven years old in March, making it the third longest in history (1987-2000 is the winner, followed by 1949-1956). Just because the bull is aging, does not mean that it is doomed. However, it does mean that the pressure is mounting for companies to deliver earnings growth in a year when their compensation expenses are likely to rise, but they are unable to pass on those additional costs to customers.

By the way, since the end of World War II (1945), there have been 12 full-blown bear markets (with losses of 20% +). Statistically they occur about 1 out of every 3.5 years, and last an average of 367 days.

MARKETS: All three indices are in correction territory and the Russell 2000 index of small stocks, as well as certain other indexes like the Dow transports, is already in a bear market, defined as a 20 percent decline from the highs. For the Dow, which would be 14,681; for the S&P 500, it would be 1,708; and the NASDAQ would be in bear market territory if it hit 4,185.

  • DJIA: 15,988 down 2.2% on week, down 8.2% YTD (8/24/15 low: 15,370)
  • S&P 500: 1880 down 2.2% on week, down 8% YTD (8/24/15 low: 1867)
  • NASDAQ: 4643 down 3.3% on week, down 10.4% YTD (8/24/15 low: 4292)
  • Russell 2000: 1007, down 3.7% on week, down 11.3% YTD, down 23% from 6/15 high)
  • 10-Year Treasury yield: 2.04% (from 2.12% a week ago)
  • Feb Crude: $29.42, down 10.5% on week, lowest settle since Nov 2003
  • Feb Gold: $1,091.50, down 0.7% on week
  • AAA Nat'l avg. for gallon of reg. gas: $1.91 (from $1.98 wk ago, $2.08 a year ago)


Mon 1/18: US Markets closed for MLK Day

Tues 1/19:

Morgan Stanley, Bank of America, IBM, Netflix

China Economic Data: Q4 GDP, industrial production, retail sales

10:00 Housing Market Index

Weds 1/20:

Goldman Sachs

8:30 CPI

8:30 Housing Starts

Thursday 1/21:

Starbucks, Schlumberger

Friday 1/22:

General Electric

10:00 Existing Home Sales

Investor Lessons from Market Anniversaries


This week we are celebrating two stock market milestones: March 9th was the six-year anniversary of the 2008-2009 bear market closing low (on 3/9/2009, the Dow Jones Industrial Average was at 6547, its lowest level since April 15, 1997; the S&P 500 was at 676, its lowest level since Sept 12, 1996; and the NASDAQ was at 1268, its lowest level since Oct 9, 2002) and March 10th was the 15 year anniversary of the NASDAQ’s all-time closing high (5,048 on 3/10/2000). What lessons can we draw from these historic turning points? I can think of no better events to learn the lesson of how investor fear and greed can lead you astray. These two powerful emotions often trump any semblance of rational thought and can cost you dearly.

Let’s start with fear, while the financial crisis is fresh in your mind. From the beginning stages of the meltdown in 2008 through the bear market low in the spring 2009 and then for months – even years – later, many investors wanted to sell everything and hide under the bed. That was an understandable feeling-it really was scary!

The big problem with selling when conditions are grim is that very few investors have the wherewithal to get back into the fray. When they do, it is usually long after markets have clawed their way back up. Acting in fear often ends up prompting you to sell low, buy high and take unnecessary overall losses in your portfolio.

The opposite of this scenario was in plain sight by March 2000. By that time, the technology revolution and the dot-com frenzy drove the NASDAQ to nose bleed territory. From 1992 to 2000, the index went from 600 to 5,000, with the leap from 4,000 to 5,000 occurring in just two months! While there were indeed great and breathtaking innovations at the time, investors went berserk and gobbled up any tech company, regardless of its profitability or viability.

Despite racking up a return of 85 percent in 1999, the biggest annual gain for a major market index in U.S. history, investor greed led investors to jump in or just as worrisome, sit atop massive profits, without regard for risk and a potential downside move. When the music stopped, stocks plummeted. By the end of 2000, the NASDAQ was halved and finished its bear-market rout in 2002, down 80 percent.

Market extremes like the heights of the 2000 bubble and the depths of the 2009 wipe out are great reminders that every investor must guard against fear and greed. The easiest way to do so is to maintain a balanced approach that helps keep those emotions in check. Every investor should create and adhere to long-term plan, which incorporates a diversified portfolio that spreads out risk across different asset classes, such as stocks, bonds, cash and commodities. Investors then need to periodically rebalance to insure that neither fear nor greed takes over.

My Dad, who was a stock and options trader for fifty years, used to extol the following three golden rules of investing, which have always been helpful reminders when I was a trader, an investment adviser and then just a plain old long term retirement investor like you. Let's call them "Albie's Big Three":

  1. Nobody rings a bell at the bottom or the top. To be a successful investor, be patient and have the discipline to stick to your game plan - do not be swayed! That said, if you make a mistake, get out quickly.
  2. Do not make a major investment decision intra-day. If the idea is a good one, then an extra 24 hours of thought will not hurt and may prevent you from executing a reactive trade that is catalyzed by market movement only.
  3. Remember that nobody really knows what is going to happen in the short-run, so do not fall prey to either bull market cheerleaders or bear market Cassandra's.

Bear Market Anniversary: Are you Still a Lousy Investor?


March 9 2014 marks the five-year anniversary of the stock market’s recent bear market closing low. That trading day, the Dow Jones Industrial Average was at 6547, its lowest level since April 15, 1997; the S&P 500 was at 676, its lowest level since Sept 12, 1996; and the NASDAQ was at 1268, its lowest level since Oct 9, 2002. Since then, U.S. markets have charged higher. Through the end of February, the S&P 500 has shot up 175 percent and including dividends, returns have more than tripled since the bear market low. For the first few years of the recovery, ordinary investors were largely on the sidelines. The experience of watching a retirement account plunge by half prompted many to say that they would never again put themselves through the pain. But over the past few years, many risk-averse investors have reentered the market, though this time, hopefully a little bit wiser.

Not so fast. According to Morningstar, which regularly reviews investors' performance results versus the funds that they own, people are lousy investors. In fact, in the ten years through the end of 2013, the typical investor lagged the mutual funds in which she was invested by 2.5 percent EACH year. What explains the underperformance? We are mere mortals, who are prompted to make emotional decisions -- at precisely the wrong times -- in our portfolios!

There are two main emotions that infect most investors: fear and greed. In 2007, when stocks were flying high and financial crisis had not yet entered the vernacular, many  allowed greed to rule, piling into risky asset classes, like stocks. Then at some point, maybe near the bottom in 2009, or even earlier in 2008, fear prompted many to sell.

Conversely, those who adhered to a more balanced approach were better able to keep those emotions in check. Yes, you may have been handsomely rewarded if you kept all of your money in stocks from the bottom until today, but the fact that so much of your nest egg was vanishing before your eyes in 2008-2009, made it more likely that you would not be able to withstand the pain. That's why the unsexy advice of maintaining a thoughtful, balanced approach to investing, which incorporates periodic rebalancing, can help you avoid the emotional decisions that greed and fear often prompt.

Here are the three ways to keep fear and greed in check:

1. Keep cool: If you had sold all of your stocks during the first week of the crisis in September 2008, you would have been shielded from the additional losses that occurred until March 2009. But how would you have known when to get back in? It is highly doubtful that most investors would have had the guts to buy when it seemed like stock indexes were hurtling towards zero.

2. Maintain a diversified portfolio and don’t forget to rebalance. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. In September 2008, a then-client shrieked to me that “everything is going down!” But that was not exactly the case: the 10 percent allocation in cash was just fine, as was the 30 percent holding in  bonds. That did not mean that the stock and commodities positions were doing well, but overall, the client was in far better shape because she was diversified.

3. Maintain a healthy emergency reserve fund. Bad luck can occur at any time. One great lesson of 2008-2009 is that those who had ample emergency reserve funds (6 to 12 months of expenses for those who were employed and 12 to 24 months for those who were retired) had many more choices than those who did not. While a large cash cushion seems like a waste to some (“it’s not earning anything!”), it allowed many to refrain from selling assets at the wrong time and/or from invading retirement accounts.