Perspectives on a Bear Market

Perspectives on a Bear Market
Photo by mana5280 / Unsplash

The powers-that-be are warning that a recession may come. From my perspective, it's already here – it just isn't real yet to the average consumer. Here's the year-to-date performance of the S&P 500.

YTD of S&P 500

Already, the S&P has lost 18% of its value.

YTD of the NASDAQ

The NASDAQ is faring even worse. It's fallen by 27%.

If you're liquid, this sounds like a great deal. As Warren Buffet has said, "Be fearful when others are greedy, be fearful when others are greedy". This is the case when you saunter over to r/WallStreetBets to check on general market sentiment.

r/WallStreetBets at current posting

Currently, everyone on Reddit is losing their collective minds. Many thought they saw a bottom, bought the dip – only for the market to plummet further. Where's the real bottom?

The answer is that no one knows. Yet, here's a couple charts that puts things into perspective.

Peak-to-trough declines during bear markets since World War II

If other bear markets are indicators, we still have a way to go. We're nowhere near the losses of the past five recessions.

Days from peak to trough during bear markets

What's more, though the last bear market was cut short due to quantitative easing, the Great Recession as well as the Dot-Bomb recession all lasted for more than a year. One can even argue that our current recession is a result of the Fed kicking the can down the road during the pandemic.

What about shorting?

If you believe that buying now will result in immediate quick wins, you may be sorely disappointed.

One way to win in a bear market is to short the market. If you want to do this with minimal risk – and by minimal, I mean you can still lose your shirt if you're not careful – one way is through ProShares UltraPro Short QQQ ($SQQQ).

Chart for YTD performance on $SQQQ

During 2022, $SQQQ has already grown 76% by valuation. Not bad – but there's a caveat.

Entire history of $SQQQ

Long term, $SQQQ is a terrible bet. It's generally a bad idea to predict the failure of the NASDAQ. If you want a fast track to the poorhouse, put all your savings in this fund! Thus, $SQQQ only works as long as you can accurately predict the direction of the market.

Personally, I don't think I can – and neither can most people. In fact, most day traders lose money.

So what to do? I believe the biggest mistake people make when looking at capital markets is to merely speculate about stock price appreciation. I get it. It's nice to look at charts going up.

But what about income?

In the midst of this bear market, it's worth asking: who's paying me now? As it turns out, even as the market bleeds red, companies are still compensating shareholders. As they should, since being a shareholder entitles you to profits.

If a company with a fair valuation has been paying a consistent dividend for years, it's probably worth buying them no matter if we're in a bull or bear market.

One example of this consistency is IBM. They have been paying quarterly dividends every year since 1970. If, in 1970, you bought $1,000 worth of IBM and just re-invested the dividends, you'd have growth that eclipses the capital gains.

However, even the most conservative companies are prone to drastic falls in share prices. Most investors believe they can handle volatility, but when plunged into a bear market, they behave differently.

The bond market

This is why it's worth looking at US treasury bonds because where bonds go, so does the market.

Market Yield on U.S. Treasury Securities - 10 Years

As you can see, 10-year treasury yields are now at 10 year highs. Should it move another 0.5%, it will be the highest yet in a decade. This interest might not seem like so much considering current inflation, but the effects are immediate.

Treasury Yield vs. NASDAQ over one year

In the chart above, Treasury Yield is represented by green while the NASDAQ is the blue line. Over the past year, 10-year treasury yields have grown 71.5%. Compare this to the NASDAQ's pitiful contraction of -9%. Hence, the rise in the yield is correlated to the fall of the NASDAQ.

By raising rates, the Federal Reserve is pretty much saying to conservative investors, "F*ck the stock market – your only safety is bonds."

Okay, but what should I actually do?

Of course, most folks who are jittery will eventually migrate to bonds because, sure, the inflation rate is still higher than interest rates. But where else are you going to park your money?

Crypto? Don't make me laugh.

Real estate? Come on, real estate is already over-valued and we're heading for correction.

Compared to the yield, not even gold is performing as well as 10-year treasury yields in the short term – and gold is often considered a safe haven.

I'm not saying that putting your money in treasury bonds is a good idea – just that this is where money is going, and that this is why the stock market could fall further. The problem with the bond market is that the upside is limited, although you do get paid.

So where should you put your money? I don't know – and I'm not writing this to give you financial advice. Rather, it's important to understand the realities of a bear market as well as any opportunities that may arise.

Most importantly, bear markets do not mean loss is inevitable. There are options. By all means, exercise due diligence and make choices befitting your circumstances.