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Almost exactly six months ago, I wrote in these pages to deliver you a message of warning.
In a special edition of Money and Markets* on September 22, 2008, I warned you NOT to expect a quick end to this epic bear market in stocks. I also outlined several steps that could help you defend and possibly even grow your wealth in this turbulent market.
The reason for my warning last September is one and the same with my biggest concern today … we remain locked in a punishing, long-term, secular bear market, and I’m concerned your investments may not be fully prepared to weather this financial storm.
Six months ago, I said … “What makes secular bear markets so catastrophic for investors is that it’s often difficult to recognize that you’re in one until it’s too late — until a good chunk of your wealth is destroyed.”
Today, the S&P 500 Index has lost more than HALF its value, from the 2007 peak.1 Many investors think the worst MUST be over by now … but I caution you to think again!
Since last September, global financial markets have changed dramatically.
- In September 2008, the Dow Jones Industrial Average was at 10,800. Now it’s at 7,400 — having lost another ONE-THIRD of its value.2
- Back then, worldwide bear market losses were $18.6 trillion. Today, investor losses have DOUBLED to more than $36 TRILLION!3
- Last September, the U.S. economy was experiencing only a minor slump of -0.5% in terms of GDP. Now, the economy is in a free fall, contracting at a -6.2% annual rate last quarter … and probably much worse in the current period.4
If you followed our advice six months ago … to protect yourself and potentially profit from this decline … congratulations. You’re far ahead of the overwhelming majority of investors in the country and the world.
If you did NOT follow our advice, everything I see today convinces me more than ever that you NEED a bear market defense plan to help preserve your wealth — it’s NOT too late to take action now. Here’s why …
Bears with Nine Lives …
Like a cat with nine lives, it’s not easy to kill off a secular bear market in stocks — the defining feature is: LONGEVITY. During the 20th Century, there were three secular bear markets in stocks. They occurred (roughly) from: 1906-1921, 1929-1942 and 1966-1982.5 These three devastating periods for investors lasted an average of more than 18 years!
There’s little doubt in my mind that we’re in another secular bear market now, which began in 2000. The key questions for investors now are:
- How low will stocks go?
- How much longer will this secular bear market last?
- How can I protect my investments and potentially profit from a secular bear market climate?
To help answer these questions, let’s crack open the history books and examine two of these secular bear markets in more detail …
After the Dow plunged 89% from 1929 to mid-1932, stocks went through some wild swings (including some strong counter-trend rallies) … before rolling over again and losing another 60% between 1937 and 1942! All in all, there were 12 distinct bear market declines (-20% or more) from 1929 to 1942, with a like number of short-term bull swings in between.
But the entire period was one, long secular bear market, since the Dow didn’t surpass its 1929 high for good until 1954.6
In other words, investors were forced to wait 25 long years just to break even. This is a history lesson NOT to be taken lightly …
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Deflation is what plagues our economy and financial markets today. But, during the secular bear market that began in the mid-1960s, it was inflation that made the situation worse. Like the current secular bear market since 2000, stocks also peaked in 1966 then made a “double-top” in 1968 at a higher level before falling sharply. The decade and a half that followed was like a sickening roller-coaster ride to nowhere …
From 1968 to 1970, stocks dropped 36%, and then rallied briefly, before rolling over for another LOSS of 48% from 1973-1974. Then came another bear market bounce, followed by a final 27% selloff from 1980-1982. In other words, market conditions remained volatile for MANY years before stocks finally recovered for good after 1982.
The end result: A punishing 16-YEAR secular bear market in equities.7
Expect More Extremes Before This Bear Market is Over …
Another key feature of a secular bear market is that it begins at extremes and ends at extremes.
The extremely overvalued tech-bubble in 2000 was the first top in the current secular bear market cycle. The double-top was completed five years later, when the housing/credit bubble collapsed in 2007.
Before markets return to normal, we’re very likely to see extremes in the opposite direction. That is … extreme undervaluation. Some investors think the S&P 500 is cheap today, with a price-to-earnings (P/E) ratio of about 12. While this is considerably less than its P/E of more than 30 at the peak in 2000, at past market bottoms, P/Es have frequently fallen into the single-digits.8 Don’t think this isn’t possible before the current bear market bottoms.
Just two weeks ago, the S&P 500 Index slipped once again to a new bear market low, the lowest level since 1996 to be exact … 12-years worth of stock market gains LOST in just 18 months! But then stocks turned on a dime and rallied dramatically, with the S&P 500 up nearly 10% in less than two-weeks.9
So, is this the beginning of another potentially powerful counter-trend rally?
It’s still too early to tell, but stocks were extremely oversold, after getting off to one of the worst years on record early in 2009. Perhaps then, the time for a strong bear market bounce has finally arrived.
If the S&P 500 does manage to extend its bounce so far, a strong, tradable rally may unfold similar to the bullish move we saw in late 2008. Were you able to profit from that rally? If you did, then you’re no doubt a very nimble trader. That’s because, if you were away for just a few weeks during the holiday season — from Thanksgiving 2008 to New Year’s 2009 — you probably missed the entire rally.
Bear Market Rallies: Enjoy them While They Last …
The common definition of a bull rally in stocks is a move of 20% or more from a previous low. According to this definition, the S&P 500 Index enjoyed a short and sharp rally of 24%, which lasted from November 20, 2008 through January 6, 2009 … a six-week long rally!10 I hope you enjoyed it while it lasted.
But this “bull market” pop to the upside was nothing more than a “cyclical” bull market move WITHIN a prolonged “secular” BEAR market. It was a classic bear market bounce in every sense of the definition. We’re bound to see more — like the one underway right now. It’s quite common during secular bear markets, to see rebounds that are brief, and sometimes powerful. These “counter-trend” rallies happen frequently.
However, you really have to be on your toes to profit from these quick POPS. You need a trader’s mentality … and you also need good timing to take your money and run before the market DROPS again to new lows … as has been the case during this bear market.
And make no mistake — we ARE still locked in the grasp of a secular bear market. How long could it last? Due to the epic nature of this crisis … the unprecedented slide in home values and stock prices already … this market turmoil could continue for many months or even years.
In fact, we may STILL be only half-way through this secular bear market!
But that doesn’t mean there won’t be opportunities to profit, both on the long- and short-side of the markets. And even if you don’t have a “trader’s mentality” it’s still not too late for you to hedge other investments in your portfolio against the probability of more market turmoil ahead.
Paralyzed by Uncertainty, How Will You Know
When It’s Time to Make Your Next Move?
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Many individual investors have a hard time navigating the twists and turns of the market, especially in today’s volatile climate.
Cashing in on brief, but profitable up-trends (and down-trends) isn’t easy, unless you are closely watching the market’s gyrations on a daily basis. Most investors just don’t have the time (or inclination) to do so.
Many investors are shell-shocked by now. Paralyzed by fear and uncertainty they are glued to the sidelines … waiting for the right time to make a move.
Moving too soon could cost you dearly should markets plunge further. Acting too late will cost you a missed opportunity should markets rebound. And if you’re not VERY careful, you may get sucked in late to a rally … just in time for the market to roll over again. This is just one of many “bear traps” you must be on guard against.
To Successfully Navigate this Bear Market,
You Need a Professional Guide by Your Side
Today’s market volatility is even HIGHER than it was during the 1930s … the worst secular bear market on record … so you could easily get whip-sawed on your own in this market.11
But that’s where the guidance of a professional investment adviser such as Weiss Capital Management can make all the difference for your portfolio.
Over the past few months, we have reviewed hundreds of portfolios of individual investors new to our firm — we’ve been busy digging through their old account statements … reviewing each holding with a fine-toothed comb.
Sadly, we’re finding that many investors still are NOT very well prepared for this secular bear market. For instance, we find that many other advisors, brokers, and financial planners just don’t believe in hedging. They tell their clients: “We don’t use hedges … just sit tight … the markets always come back.”
Perhaps, but as we’ve seen, “always” can be a very long time during a secular bear market.
The magnitude of the market’s decline may have taken many professionals by surprise, granted. But it is quite obvious that at least SOME defensive actions are required. That’s especially true if we’re only half-way through today’s secular bear market.
At Weiss Capital Management, we have taken a number of steps to help protect and defend our client’s wealth in this environment:
First: On a firm-wide basis we currently hold just over 43% of client assets in cash and equivalents, to help reduce risk, and wait patiently for better buying opportunities.12
Second: We use periodic rallies within this secular bear market as an opportunity to sell some holdings … to re-position our portfolios … to trade up in quality in terms of our holdings … and to further reduce risk of loss.
Third: The vast majority of our professionally managed strategies currently hold hedges — such as inverse mutual funds and ETFs — that seek to profit from volatile and declining financial markets.
If you have not yet prepared your own investments by taking similar steps in your portfolio … there is still time … but I urge you to do so now!
To provide you with more details about our current views on the economy and the fate of financial markets, we’re holding a special video briefing at noon on Wednesday … just two days away …
Phase II: Bear Market Update
Your Bear Market Defense Plan
Just click this link to let me know you’re attending, and I’ll make sure we get you the instructions for accessing this special Webinar. As part of the event, we’ll provide more details about the actions we’re taking at Weiss Capital Management to help defend our client’s wealth in this secular bear market.
You’ll also learn more about our Weiss Bear Strategy, a professional investment program that’s specifically designed to go UP in this DOWN market. I invite you to join us for this special online briefing this Wednesday, March 25. You may reserve your space now by registering here.
Best wishes,
Sharon A. Daniels
President
Weiss Capital Management, Inc.
*Weiss Capital Management (an SEC-Registered Investment Adviser) is a separate but affiliated entity of Weiss Research, the publisher of Money and Markets. Both entities are owned by Weiss Group, LLC.
The preceding is a paid for editorial that may contain forward-looking statements regarding intent and belief with regard to Weiss managed strategies and the market in general. Readers are cautioned that actual results may differ materially from those statements.
The Phase II: Bear Market UPDATE Webinar contains information on the Weiss Bear Strategy. Past performance is not indicative of future results and as with any investment program it is possible to lose money by investing in the program. There are no guarantees that the program will achieve its stated objectives. Prior to investing, please read the Firm’s ADV Part II and program specific materials regarding risk, suitability, and important disclosures.
1 Bloomberg data: 3/11/09
2 Ibid
3 Ibid
4 Ibid
5 Business Week: Finding Opportunities in a Bear Market, 12/2/08
6 Business Week: Stock Markets: When Will the Bull Return?, 3/5/09; Bespoke Investment Group: Historical Bull and Bear Markets for the Dow: 1900-Present
7Bespoke Investment Group: Back to the “Bear”, 3/2/09
8 Bloomberg data: 3/19/08
9 Bloomberg data: 3/17/09
10 Bespoke Investment Group: Back to the “Bear”, 3/2/09
11 Merrill Lynch: Market Analysis Comment, 3/9/09
12 Weiss Capital Management Client Holdings Appraisal Report, March 10, 2009
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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