Musings on a Bear Market
The bear market is a reminder that the herd mentality can be an ugly thing. For ways to cope with the slump, let’s enter the bear’s lair for a closer look at the beast. First, the numbers.
U.S. stocks rebounded Wednesday as follows: the Dow Jones Industrial Average +1.00%; the S&P 500 +1.46%; the tech-heavy NASDAQ +2.50%; and the small-cap Russell 2000 +1.36%.
Wednesday’s bounce came in the wake of the Federal Reserve’s decision to hike rates by 0.75%, the biggest increase since 1994. Wall Street was reassured that the Fed is taking inflation seriously. But stocks still hover in bear territory. In pre-market futures trading Thursday, stocks were mixed.
Tales from the crypto…
The cryptocurrency crash has deepened, as investors move away from risk-on assets. Bitcoin (BTC) has nosedived to a new 18-month low, dragging smaller “alt-coins” down with it.
Because the mining of crypto has built-in limits, crypto was supposed to function as an inflation hedge. Like so much about crypto, those claims turned out to be a mirage.
The total value of the cryptocurrency market has plunged by about 65% since autumn, with no bottom in sight, even as inflation hits a 40-year high. The crypto music has stopped, and investors are scrambling for chairs. The crypto realm’s bust was predictable, considering the fast creation of bubble conditions (see chart).
Don’t get me wrong: I’m no Luddite. I acknowledge that crypto has wrought permanent changes to the global financial system. I believe that many of crypto’s underlying technologies (e.g., blockchains) will live on as commercially viable and worthy of investment, regardless of the see-sawing of individual coins.
However, in this volatile and bearish environment, investors are fleeing aggressively speculative assets. That’s especially true of the younger, inexperienced day traders who piled into crypto and who tend to run for the hills when conditions get scary.
Crypto entities sometimes resemble Ponzi schemes. Case in point: Crypto startup Celsius Network, which in May claimed to have more than 1.5 million users and $11 billion in assets on its platform, declared Monday that it would stop letting users withdraw, swap, or transfer their assets, citing “extreme market conditions.” The firm subsequently hired restructuring attorneys.
With shenanigans such as these as a backdrop, it’s an opportune time to discuss fundamental value.
Short-term volatility can seem painful, but probably not as potentially harmful as short-term thinking when it comes to portfolio management. Losses aren’t losses until they’re locked in by sales. We have over 100 years of history showing that the stock market climbs higher over time.
When the market is in turmoil, it’s best to focus on long-term goals rather than short-term fluctuations. Investors can take a step back and see that their equity portfolios have posted substantial returns over the last couple of years. They can focus on factors such as their dividend income stream, which isn’t likely affected by market volatility.
By looking at these positive portfolio aspects through a broader lens, it’s easy to see that a correction or even bear market likely hasn’t destroyed long-term financial goals.
Investors should be paying attention to equity valuations and their underlying fundamentals, rather than share price movements. If you’re a long-term investor, stocks getting cheaper is a good thing. It allows for you to accumulate more shares at better values.
Tech will rise again…
The Russia-Ukraine war, hot inflation, supply chain disruptions…I’m not optimistic that these problems will be resolved in the near term. However, that doesn’t mean investors should sit idle in cash. If you hold substantial cash, you’re almost guaranteed to have your wealth eaten away by inflation.
Selling during a downturn is a rookie mistake. It’s the opposite of buying low and selling high. Inherently strong stocks invariably bounce back.
At this point, with the NASDAQ down about 30% from its high, a lot of tech stocks that were previously oversold are bargains again. Many of the sector’s stocks are tapped into megatrends that will continue to unfold when this bear market inevitably ends.
Technology is one of the most cash-rich and least indebted of all sectors. A slew of battered tech stocks boast ample cash flow that they’ll be able to leverage into upside, despite the travails of the sector or broader market.
The tech sector had gotten frothy and was overdue for a pullback. But over the long term, the sector will prosper again, due to continual innovation.
Among tech tailwinds are work-at-home digital capabilities, renewable energy, health services, virtual/augmented reality, robotics, artificial intelligence, electric vehicles (EVs), orbital satellites, and the Internet of Things. Facilitating these tech wonders is the global roll out of ultra-speedy fifth generation (5G) wireless technology.
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John Persinos is the editorial director of Investing Daily.