September 23, 2022

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A Bear Market Blueprint

With the market losses on Friday morning (9/23), the S&P 500 reached the 20% negative level last seen in June. The Federal Reserve has embraced a policy that is hostile to asset prices (inflation is the increase of asset prices and the Fed is focused on reducing inflation), and economists are increasingly forecasting a “hard landing,” also known as a recession. Employment remains robust, with job listings plentiful, but this may be the last leg of the stool that the economy has to stand on. The Fed has forecast an increase in unemployment next year, as they slow the economy to reduce persistent inflation.

We certainly didn’t bury the lead in this update; yes, there is a lot of bad news. Bear markets are painful, and we find ourselves simultaneously in a bear market for stocks and a historically negative year for bonds. The Barclays’ Aggregate Index, the broad bond benchmark, is down over 13% year to date through last night. Whether you are an equity investor, a bond investor, or have a balanced portfolio, this year has been awful. There has been nowhere to hide.

With all of this bad news, what are investors to do? Cutler’s blueprint for what to do in a bear market is summarized below:

Step 1. Do not emotionally sell your portfolio. Investors do not benefit from playing “defense” in a down market. Traditionally, those that sell after big market drops are more likely to miss any subsequent rally and therefore end up with less money at the end of the cycle than if they had “stayed the course.”

Step 2. Review your goals with your advisor. Your portfolio is positioned for volatility based on your goals and risk profile. Have your goals changed over the past year? Has the bear market changed your views on risk? Reach out to your advisor to talk through any changes that may have occurred.

Step 3. Look for opportunities for tax efficiency. While not relevant for every client, tax losses can create value in a bear market. Losses also provide an opportunity to reposition portfolios that may have previously been restricted by unrealized gains.

Step 4. Dollar-cost average long-term savings. Retirees typically have most of their assets invested, but if you have income, consider increasing your savings during this sell-off. If you are a 401(k) investor, you are buying stocks 20% lower than at the start of the year. Savers who have had cash on the sidelines may look to gradually contribute to their portfolio to take advantage of lower prices.

Mr. Rogers famously said, “When I was a boy and I would see scary things on the news, my mother always said, ‘Look for the helpers. You will always find people who are helping.’” What are the helpers for today’s investors? As advisors, we are always looking for asset classes that will work best in the current market. We believe bonds will regain favor in a weakening economy, and dividend stocks will continue to outperform if we continue to have a down equity market. While bonds have sold off, many now have a yield exceeding 4%. Investors haven’t been able to achieve a 4% yield in many years, and this is a great source of cash flow for portfolios. Dividend stocks, the bedrock of Cutler’s investment philosophy, have held up much better than the broader indexes. Consider that the Russell 1000 Value index (a broad measure of large-cap value stocks) is down much less than the market indexes at 13.95% through last night.

 

All opinions and data included in this commentary are as of September 23, 2022 and are subject to change without notice. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice. Nothing herein should be construed as tax advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.

We remain long-term believers that investing is the best way to create and preserve wealth. If you would like to talk through your blueprint for navigating a bear market, please reach out to your Cutler advisor.