UNDERSTANDING BEAR MARKETS FOR SUCCESSFUL INVESTING

Don’t miss the bull for fear of the bear

‚ÄúPermabears” who predict market downturns but often miss out on gains. Selling in bear markets is not the key to long-term success; instead, weathering market volatility is crucial. While it may seem logical to bet solely on bullish or bearish moves, this approach can limit gains. To reach financial goals, staying invested and enduring short-term turbulence is vital. Usually the market trends positively 80% of the time and adaptability and a focus on long-term strategies are key to thriving in ever-changing market conditions.

 

Bear Steepening: A rare warning signal for markets

Let us be aware of the bear steepening in bond markets and its potential risks to stocks and the economy. Bear steepening involves rising interest rates, particularly long-dated yields, which can negatively impact the economy. This trend could affect financing, exacerbate negative market effects, and impact various business models. The combination of bear steepening and a weakening economy, historically have led to economic distress or market turmoil. The current situation looks like 2018, where sustained bear steepening contributed to a market downturn. Remember, it is seen as riskier due to higher inflation and limited Fed flexibility.

 

Indicators shift to neutral for U.S. stocks

Technical indicators that previously signaled optimism for U.S. stocks have shifted to a more neutral outlook. Factors like stock positioning and cash allocations, which indicated bearishness at the start of the year, have become more neutral as investors turned optimistic. While bearish positioning was beneficial in the first half of 2023, strategists now see it as less supportive in the second half as potential for further market gains is reduced. While optimism has grown, it remains below extremes and cash levels are not at historical lows either. Cash allocations among fund managers have dropped but retail investors’ bearishness has also declined significantly.

 

Bear hug is dangerous

Lastly, let us dispel the myth that markets always go up. Markets can experience prolonged periods of negative returns, and one or two market crashes can change the game. Time is a precious asset for investors and compound market returns don’t exist for eternity. Understanding bear markets matters more than one might think. While lost principal can be recovered, lost time between today and retirement cannot. Valuations, risk management and returns expectations must be adjusted based on market conditions.

 

Rising U.S. Treasury yields, concerns over China’s property crisis and the Evergrande bankruptcy have added to market uncertainty.  In such a situation, investors who are monitoring market developments must focus on third-quarter earnings announcements in October.

 



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