Bear Market Buys
|
|
|
|
Intro |
|
|
Stonks don’t always go up. |
|
|
Remember the days when everything only went up. The market lifted just about everything investors bought – irrespective of the quality of the assets. |
|
|
|
|
But all of that has changed this year. |
|
|
We are just over 9 months into a bear market that feels like it is hitting us from all angles. |
|
|
Domestic stocks? Down nearly 25%. |
|
|
International Developed stocks? Down almost 28%. |
|
|
Emerging Markets? Down nearly 29%. |
|
|
Bonds? Down almost 14%! |
|
|
It feels like there is nowhere to hide from this bloodbath. Most days this year have looked like this: |
|
|
|
|
What should we do when the market is acting like this? |
|
|
Do we sit on the sidelines in cash? |
|
|
Do we reallocate our portfolios in a specific direction? |
|
|
There is no right or wrong answer here, but let’s look at a few key ideas that we might be able to pursue: |
|
Wait it out – CASH |
|
|
|
|
For some investors, market volatility is too much to handle. There is no way they can go a day, let alone an hour, without checking to see what the market is doing. |
|
|
For these types, holding cash makes them feel more comfortable because they don’t see the effects of inflation every day. Their account balance will stay the same if they leave it in cash. |
|
|
When the noise of daily market movements becomes the focus, that is bad news for investors. And in this scenario, it might make sense to get out of the market and sit in cash. |
|
|
This answer does not apply to everyone, and it can be used in a few ways: |
|
|
1. Tactically moving to cash – investors might make a move to cash for a specific future purchase. This is often done because there is a large purchase in their future that they need capital on hand to make, and moving to cash today would secure the funding source. |
|
|
a. House Purchase |
|
|
b. Business Purchase |
|
|
c. Vacation plans |
|
|
d. Retirement Home deposit (for parents?) |
|
|
e. Vacation Home |
|
|
2. Strategically moving to cash – investors may have a cash allocation that has been underfunded in the past because of the low-yielding environment. This might be a good time to refill that bucket to have some dry powder for future deployment. |
|
|
3. Selling everything and going to cash – some may need to get out of the market entirely. Sit on the sidelines and wait for a more comfortable period to put their money to work. |
|
|
Every investor is different – but in our opinion, now is not the time to sit in cash. |
|
|
Then, what is the right approach? |
|
BUY SOMETHING |
|
|
In fact… Don’t stop buying. And Just Keep Buying |
|
|
Historical data shows us that investors who continue to buy throughout market turmoil – ups and downs – are the ones who are rewarded the most. |
|
|
Removing emotion from our investment process is the key to successful investing. |
|
|
Look at JP Morgan’s Guide to Markets, which provides a host of helpful information and charts – namely, and this one shows us the average return of investors compared to the market. |
|
|
|
|
Emotion drives this underperformance for investors. |
|
|
When investors flee the market because it has reached bear market territory or because experts are screaming about how we are all doomed, they are condemned to underperform the broader market. |
|
|
This can be why most investors earn an average return of 3.6% over twenty years when the market has returned 9.5%. |
|
|
Removing emotion from the equation and setting investment to become an automatic function improves that chance of success. |
|
|
The other key is that time is an investor’s greatest ally. Short periods of market volatility cause much fear and often significantly poor performance – but those who ride the wave and hold on tight are rewarded. |
|
|
|
|
Reminding investors that this year hurts – everything is down, and portfolios can’t seem to catch a break but focus on the long-term. Focus on the years ahead and behind. One year does not make an investment great – it often takes time to see the fruits of your labor. |
|
|
Our recommendation: stick with your investment strategy. Keep buying or holding. Tune out the noise. |
|
|
The next logical question then is – what should you buy? |
|
|
This is where we shine! All our Insider letters have been painting this picture for investors: there are good companies that deserve investment. |
|
|
And in other cases, some companies get much hype, but should be avoided. |
|
|
While most younger investors may be turning against investing in equities, we still believe this is the right area to deploy capital. |
|
|
Remember that this experience is a short-term phenomenon. The US has experienced a strong bull market for the last 12+ years. |
|
|
Most young investors have not been investing longer than that! News outlets will throw out articles about how Millennial Investors are dropping equities because they don’t like the current market environment just to stir up trouble. |
|
|
But by extending our view, investors can see that black swan events, bear markets, or unexpected volatility have always been short-lived. And throughout all of that, investors who stayed in the market were rewarded for being disciplined: |
|
|
|
WHAT SHOULD YOU BUY |
|
|
Every bear market is going to be somewhat different. You may end up with the same losses in your portfolio, but usually, there are other causes for each bear market. |
|
|
Earlier this year – everyone's focus was that the bear market was short-term anxiety and fear around Russia-Ukraine. Then it was inflation. |
|
|
Now it seems to be inflation and recession fears. |
|
|
But underlying all these fears is a larger moving beast that has been neglected and shunned for a while now that we think provides an opportunity for investors to look closer: |
|
|
Energy. |
|
|
The bane of many an ESG-warriors’ existences. Or maybe the reason for their existence. |
|
|
The energy sector has been bad-mouthed ever since somebody *cough* Exxon *cough* dumped a bunch of oil in the Gulf and messed up that entire ecosystem. |
|
|
We can’t always expect the Energy sector to be the top performer during bear markets. |
|
|
But during this bear market? It’s a huge winner. |
|
|
|
|
Energy is the only sector in 2022 that appears to be surviving. |
|
|
And it appears this sector will continue performing well, given what is happening in broader markets. |
|
|
Energy's stellar performance this year can be traced back to the higher price of energy commodities we have seen. |
|
|
Russia invading Ukraine caused a panic that led to supposed supply issues, therefore driving prices of oil, gas, and other energy commodities much higher. |
|
|
Just look at the spikes we saw in prices back in February & March of this year that have continued to last throughout the year: |
|
|
|
|
But apart from prior high prices, we are staring down the barrel of an impending energy crunch across the pond as the EU scrambles to cover its shortfall of natural gas imports going into the winter months. |
|
|
Russia typically supplies about 40% of Europe’s natural gas needs. |
|
|
That number is falling as the war continues to rage and Russia slows down (and in some cases has stopped) the flow of natural gas via their Nordstream 1 pipeline. |
|
|
This means that natural gas producers and exporters will be in a good position to step in over the short term if they have the supply capacity to cover the shortfalls across Europe. |
|
|
We can briefly highlight two companies that may be well-positioned to take advantage of this ongoing scenario. |
|
|
Centrica (Ticker: CNA.L), a UK-based natural gas supplier, has signed a deal with Norway’s Equinor to supply them with excess natural gas for the next three winters. Centrica has been through the wringer from a business perspective, but it may be turning a corner in this market. |
|
|
And Cheniere Energy, Inc. (Ticker: LNG), the largest US natural gas exporter and the second largest global exporter, continues to expand its operations at breakneck speed, allowing them to get trains and pipes up and running before their contracted date, which allows them to ship off the excess supply at current (high) market rates. |
|
Centrica |
|
|
Bulls |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bears |
|
|
|
|
Key Metrics (as of 10.14.22) |
|
|
|
Cheniere Energy, Inc. |
|
|
Bulls |
|
|
|
|
|
|
|
|
|
|
Bears |
|
|
|
|
|
|
Key Metrics (as of 10.14.22) |
|
|
|
Conclusion/Recommendation |
|
|
Watching your portfolio get rekt day in and day out sucks. There’s no way around that. |
|
|
But there are solid moves you can make to help get yourself through the tough times. |
|
|
There is no shame in going to cash - some investors cannot handle the volatility and are better off sitting on the sidelines waiting out the storm. And right now, those investors can still earn a little 2-3% return on that cash. |
|
|
But for those who are done waiting, and want to see more green in a sea of red, look closer at the energy sector. There are some winners already, and some are poised to benefit from the journey ahead. |
|
|
Bottom line: just keep buying. |
