Portfolio Moves for a Bear Market

The bear market in U.S. stocks arrived with unusual speed this month. In just 20 trading days, the S&P 500 fell 27%, a clear outlier in terms of velocity of the sell-off, compared to prior bear markets.

The impact of the coronavirus pandemic and oil-price weakness may make a U.S. recession this year a near certainty. However, my current analysis of the economic impact of these two crises suggests that the market has already factored in what may be a worst-case scenario.

In that context, my advice for long-term investors is to work with their Financial Advisor to make sure their portfolios are appropriately balanced between stocks and bonds, based on their time horizon and risk tolerance. After a move of this magnitude, that could mean gradually adding stock exposure and reducing fixed-income holdings, especially long-term Treasuries, which have risen in value, as interest rates have fallen (bond prices move inversely to interest rates).

Here are four reasons the building blocks for a market recovery may soon be in place:

• Stock prices seem attractive: The current price-earnings ratio (a key measure of equity valuation) of the S&P 500 is now about 16 times forward earnings, down from more than 19 at the peak of the S&P, and a reasonable level historically. Plus, given the broadness of the sell-off, active portfolio managers now likely have opportunities to buy individual stocks at more attractive valuations.

• Monetary stimulus is underway: The Federal Reserve has already cut interest rates and recently ramped up a program of bond buying, known as quantitative easing. I expect more stimulus to come. Globally, other central bankers have also shown willingness to use all the tools at their disposal to stimulate their respective economies.

• Fiscal stimulus is likely: Measures to help consumers and businesses make up for lost income are likely. Programs could include access to small business loans, Medicaid expansion, extended unemployment benefits and local aid packages, just to name a few possibilities.

• The U.S. consumer is in good shape: Unemployment is at 50-year lows. The housing market may pick up further, as mortgage rates fall. Consumer credit levels are generally healthy. Lower oil prices will help reduce costs for many consumers and businesses.

None of this is to say that investors should rush to buy stocks at current levels. Markets are likely to be choppy for the next three to six months, and I expect more spikes in market volatility, based on news events.

Instead, consider deploying a dollar-cost-averaging strategy, a disciplined approach, whereby investors buy set dollar amounts of stock at regular intervals (let’s say, once a month or once a quarter). That way, you avoid certain market-timing pitfalls, such as the risk of buying all at once ahead of a dip.