Opinion: The Dow Jones and S&P 500 are likely to fall in a bear market, but your portfolio doesn’t have to go down with them

After talking to my nervous neighbors about the Nasdaq stocks they own, I discovered that most don’t want financial advice. So I offer it here.

The Nasdaq COMP Composite Index,
is in a bear market. To be specific, the Nasdaq reached an intraday high of 16,212 on November 22, 2021. Anything below 12,970 on the Nasdaq represents a 20% decline from that high. On May 6, the Nasdaq closed at 12,144, well into bear market territory. Charts from some long-time market darlings like Meta Platforms FB,
apple aaapl,
amazon.com AMZN,
netflix nflx,
and Alphabet (Google) GOOG,
look scary.

The odds are now good that both the Dow Jones Industrial Average DJIA,
and the Standard & Poor’s 500 SPX,
will follow the Nasdaq in a bear market. If the Dow falls below 29,561, it will technically be in a bear market (down 20% from its all-time intraday high of 36,952 on Jan 5, 2022).

If the S&P 500 falls below 3,854, it would technically be in a bear market (down 20% from its all-time intraday high of 4,818 on Jan 4, 2022).

long way down

If bear market forecasting models are correct, there is a long way to go before US markets bottom out. Don’t be surprised if the S&P 500 sinks to 3200. This is not a prediction, it’s an educated guess based on historical trends and technical analysis.

I was schooled in bear markets by the late Mark D. Cook, who warned for years that the US market controlled by the US Federal Reserve was obscenely overbought. Though early on his predictions, Cook’s advice was spot on (read his latest bear market warning in my MarketWatch column from Dec 4, 2021).

Cook looked for bear market clues. First, the presence of failed rallies, and second, the evidence that buy-the-dip strategies have failed. This is exactly what has happened to the Nasdaq. He also warned that prices are the last to fall in a bear market, which is what is happening now.

Bear markets are bad for almost everyone

Most investors have never experienced the destructive nature of a bear market. This includes many money managers who have enjoyed a 13-year bull market, one of the longest in history. On the way up, making money is easy and fun, but on the way down it’s hard to keep emotions in check and get a good night’s sleep. As many are learning the hard way, successful stock picking is hard work.

Some people believe that professional traders like Cook really enjoy bear markets. In fact, they are difficult for most people to manage, including merchants. First, in the midst of a vicious bear market, you get unexpected rallies that only last a day (last week, for example, the Dow rose 1,000 points, then fell even more the next day). These “one day wonders” can decimate the accounts of short sellers who do not cover their positions on time.

Perhaps the only ones who are successful during a prolonged bear market are traders who are excellent market timers. They use put options, hedging strategies and short selling strategies to make money but it is very challenging. Most investors who can’t take the pain of a downtrend market tend to move into cash.

Shop and wait (but not forever)

The vast majority of investors follow the buy-and-hold advice of market veterans, including Peter Lynch, Warren Buffett, and John Bogle. As long as you’re willing to hold for the long haul (more than five years, but usually much longer) and don’t panic when markets go down, in theory your portfolio should return to its old highs. Until now, that has always been the case for the US market.

There are no guarantees, of course, because a lot depends on the stock you own. However, if you are properly diversified, you can survive a bear market. Unfortunately, some stocks will not survive, one of the reasons why it is important to study both technical and fundamental analysis. Do your homework on the stocks you own and don’t rely on insiders or sellers to make trading decisions.

Good news in a bad market

I want to end on a positive note. Bear markets tend to be short (from a few months to a year). When the downtrend ends and most stocks stop falling, there will be incredible opportunities to buy stocks at fantastic prices, especially for those with cash.

If you are an indexer using dollar cost averaging strategies, you will have bought more shares at lower and lower prices during the bear market. Your account will be well positioned to make a full recovery when the markets finally start to recover.

When the US market was steadily going up, it seemed like most stocks would never go down. As the market continues to fall, it can feel like many stocks will never go back up. But bear markets end. Someday.

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), explores investing strategies in rising and falling markets.

Plus: ‘The Fed Always Screws Up’: This Forecaster Sees Inflation Peaking And US Stocks In A Bear Market By Summer

Also read: 8 ways to protect your money if you think stocks are going to go even lower

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