The S&P 500 has entered into a bear market, like its tech-heavy cousin Nasdaq which has been underperforming due to the crash in tech stocks. What are bear territory stocks? What are the investment options in a bear market?
The S&P 500 is now at the lowest level in 2022 and has entered deep into the bear market territory. The world’s most popular index briefly entered a bear market in May 2022 as well but stocks subsequently rebounded before plummeting again in June.
What is a bear market?
Markets are said to be in a bear market when they fall 20 percent or more from their most recent all-time highs. As for the S&P 500, it hit its all-time high at the beginning of 2022 only and it seemed that the market would continue its momentum from the previous years. The S&P 500 gained almost 27 percent in 2021 and delivered double-digit returns in 2020 and 2019 as well.
What are bear territory stocks?
Just like the index, stocks are in a bear market when they fall over 20 percent from their recent highs. Over half of S&P 500 stocks are in a bear market territory. All the FAANG stocks are in a bear market and Netflix has lost almost three-fourths of its market cap in 2022.
Are bear territory stocks a good investment?
Just because a stock has fallen into a bear market, it doesn't make it a buy or sell fundamentally. It's better to weigh each stock against its fundamentals and valuations. For example, several de-SPACs still don’t look like buys despite falling 80 percent or more from their IPO price. On the other hand, stocks like Apple and Alphabet look like good long-term buys now even though they're in a bear market and have shed over a quarter of their market cap in 2022.
How to invest in a bear market
In a bear market, the short-term performance of your stock portfolio would blink red. It's important not to panic and make irrational decisions. The average bear market lasts less than a year and quality stocks eventually recover in the long term.
Often, a bear market is among the best times to buy stocks. As the 19th-century British financier, Nathan Rothschild said "the time to buy is when there's blood in the streets.” The investors who bought stocks during the bear market in the first quarter of 2020 are still sitting on massive gains on their investments.
In a bear market, it's important to not get carried away and invest all the money in a single shot. Instead, it's prudent to invest in a staggered way. While no one can call a bottom precisely, you can reduce the risk through a staggered buying.
Stay calm in a bear market.
If you hold a portfolio of fundamentally strong companies, more often than not you would be better off not selling stocks in a bear market. Staying calm is the key in a bear market since witnessing a bloodbath in the portfolio can be tough to handle for many investors.
Even if you buy the dip during bear markets, it's better not to go overboard. It would be prudent to keep some emergency funds aside since a bear market might be followed or accompanied by a recession. If the U.S. economy enters a recession, you can consider some of the recession-proof stocks.