Are You Ready for the Next Bear Market?

Nov 12, 2021

I don’t mean to alarm you…

But I believe it’s time to prepare for a bear market in stocks.

Now, let me be clear…

I’m NOT predicting that a bear market is imminent.

In fact, given the recent breakout in the major U.S. indexes, there’s a good chance the current bull market could extend well into 2022.

So please understand there’s absolutely no reason to panic and sell otherwise healthy stocks today.

But make no mistake… A bear market is coming.

And I suspect most folks will be unprepared when it arrives.

Now, you may be surprised to see me say that.

After all, it seems like the stock market has been climbing a “wall of worry” for years now. And measures of investor sentiment show that many folks are still quick to turn bearish on stocks at the first sign of trouble.

However, these same measures also suggest that these bouts of pessimism are reversing more quickly than they have in recent years.

For example, CNN’s Fear & Greed Index — a popular composite of seven different sentiment indicators — fell to near 20 as the market pulled back last month.

This level represents “extreme fear.” And in the past, it has often taken many months for sentiment to rebound from similar levels.

But today — just over one month later — the index is back at 85, deep into “extreme greed” territory. That probably isn’t what you’d expect to see if investors were legitimately worried about stocks.

Fund flows are sending a relatively bullish message as well. Despite several similar bouts of pessimism in the past couple of years, investors have been putting a ton of new money in stocks.

In fact, according to a recent report from Bank of America analysts, investors are on pace to put more money in stocks this year than in every other year since 2001 combined.

In other words, while many folks have been quick to turn bearish, it appears very few are concerned about a significant decline in stocks.

It’s not surprising. Just look at what’s happened over the past couple of decades.

Yes, we’ve experienced several bear markets. But they’ve all been relatively brief.

The bear market following the 2008-2009 financial crisis was severe. But it lasted less than a year and a half — with most of the decline occurring in just six months — and stocks started rebounding immediately.

It’s been a similar story for every significant decline since, culminating with the COVID-19-related crash last spring. That was among the sharpest stock market drops in history. But it lasted just three months, and stocks were already back at all-time highs by the summer.

The closest thing to a real bear market most of us have experienced was the dot-com bust early last decade. (Though many of today’s investors weren’t even around for that one.) The overall market fell a little more than 50% over a two-and-a-half-year period from early 2000 to late 2002.

Why does this matter? Because bear markets aren’t always so brief.

The most famous example occurred during the Great Depression in the early 20th century.

Most folks know that the stock market crashed in October 1929. In total, stocks lost nearly 50% of their value from September through November that year, and then another 80% over the next three years.

But that wasn’t the end of it…

While the worst decline was over, the bear market went on for another 10 years or so. Investors suffered through seven more sell-offs ranging from 20% to as much as 50% over that time.

And the market didn’t make a new high until late 1954, nearly 25 years after the previous peak in 1929. Even including dividends, many investors were underwater for a decade or more.

The most recent example was the bear market of the late 1960s and 70s. Between 1966 and 1983, the overall market experienced seven separate declines of 25% to 47%.

This bear market wasn’t as severe as that previous one in nominal terms. (Though after inflation, it was probably close.) But it lasted nearly as long.

In this case, the market didn’t make a new all-time high until the end of 1982. That was nearly 17 years after its previous peak.

The 1970s bear market is also noteworthy because it shares some similarities with today’s market environment.

At that time, inflation was stirring for the first time in decades. And like today, many stocks back then — especially the most popular, large-cap stocks — were trading at extremely high valuations.

Many of these companies performed relatively well during the bear market. But that didn’t stop their stocks from plunging as valuations crashed back to earth.

Given today’s extreme valuations, the same thing could easily happen in the next bear market.

Of course, I’m not predicting that WILL happen.

I’m simply saying that it’s possible. Yet I suspect most investors are completely unprepared for this possibility.

That’s because many folks have come to believe that “stocks only go up,” and every decline is a great buying opportunity.

To be fair, that has been a winning philosophy for many years now. But in a prolonged bear market, it’s a recipe for disaster. Many folks could lose everything they’ve worked so hard to save.

I don’t want that to happen to you.

So, over the next few weeks, I’m going to share some simple steps you can take today — or prepare to take in the future — to protect yourself from the next bear market.

You’ll be ready to protect your hard-earned profits whenever it begins. And you’ll be well-positioned to take advantage of the opportunities that are sure to arise.

In the meantime, if you have any initial bear market questions or concerns you’d like me to address in this series, you can email me directly at [email protected]. As always, I can’t personally respond to every email, but I promise to read them all.