Bear Markets – Finding a Bottom can be Painful

Bear Market

The VIX remains stubbornly high, market indexes and stocks of all sizes are testing lower and lower bottoms – is peak fear on the horizon?

If you’ve been investing for years like I have, things look eerily familiar, but if you just started investing during the recent Bull Market you may be looking for a place to run and hide.

Welcome to Bear Market territory. The FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) are now officially in bear market territory (defined as a drop of 20% or more), and their heavy weighting in popular indexes like the S&P are helping pull the stock market down farther.

This time around the bear market started with frothy high-growth tech, meme stocks and SPACs – mostly unprofitable or economically vulnerable younger companies with little (or no) sales. Then it spilled over to larger company stocks as the Federal Reserve continued raising interest rates, and today even the crypto world swooned as the price of a so-called ‘stable’ coin sank 99%, becoming almost worthless.

From a fundamental perspective, first-quarter earnings have come in slightly better than expected, but the forecasts were reduced earlier in the quarter when analysts began to fear that inflation would start dinging corporate profit margins, so it wasn’t a very high bar to climb over.

After days of selling, investors may be eager to hunt for bargains, but they risk getting caught in Bear Market Traps (being lured into buying stocks that recently rebounded, just to turn down and sell off even more). Bear markets can be costly to investors who trade on emotion – trying to time the market doesn’t usually end up well either.

I won’t try to predict the future, and I don’t know if we’ve reached full capitulation (when fear is so widespread that the sellers have all sold), but we could be getting closer to a near-term bottom if the market action I’ve witnessed over the past few days is any indication. Today it felt like sellers were getting tired, and there were some signs of short covering in a few highly volatile meme stocks that had extreme trading swings. These are a few of the signs that could indicate that a market upturn is ahead, but only time will tell.

During bear market cycles, proper diversification can prevent investors from getting overly concentrated in one stock or sector of the market that might sell off more than the rest (after all, who wants to lose even more money?), and rebalancing investments to take advantage of new market conditions might help investors weather downturns while maintaining some upside potential. So…what should you be doing with your investments…?

If you’re wondering if (or when) you should be making changes in your portfolio, of if getting a second opinion from a professional would help you sleep better at night, click below to schedule a 30-minute Zoom Portfolio Review.

*The above commentary is general information only, it is not a recommendation to buy or sell anything.