Russian Bear Sighting

Is a bear market possible, and what should investors do about it?

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Reviewed by: Allan Roth
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Edited by: Allan Roth

Multiple unconfirmed reports have come in regarding the spotting of a bear in the Nasdaq on the morning of Feb. 24. But at the end of the day, an official search found no bear in the area (as markets rebounded sharply).

Reports are that it’s an unusual bear of Russian origin, nicknamed “Putin,” and has already wrought havoc in the markets (and far worse for the people of Ukraine).  

Though markets have been damaged, it has not yet been confirmed that the bear was the cause.

If it is a bear, it appears to be so different from the last three in that high quality bonds have always been a safe harbor that no bear has attacked since the stagflation days of 40 years ago when the bear ravaged stocks and all bonds.

The Vanguard Total Bond ETF (BND) is down 3.97% for the year as of Feb. 24 on top of a 1.86% loss last year. Only high-quality bonds were left unscathed during all three of the past bear attacks. There is fear the bear will attack in full force.

 

Asset Class Dot ComRE/FinCOVID
Total USWilshire 5000 -48.6%-55.2%-34.8%
Small ValueWilshire Index-2.8%-59.7%-43.3%
Lg GrowthWilshire Index-64.0%-51.1%-33.5%
REITWilshire index34.1%-71.3%-41.7%
Vang Tot Bond VBMFX 27.0%7.3%-1.1%
Vang Hi Yield VWEHX -2.2%-23.5%-19.7%
PME Invesco Opp OPGSX 34.0%-43.0%-32.3%
Vang Total Int'l VGTSX -49.0%-60.3%-33.3%

 

What To Do Now

In spite of the worst-case scenario of Putin’s attack on Ukraine, markets bounced back, and we are only in correction territory. Is this a “dead cat bounce,” or had markets already anticipated these horrific events? Only time will tell.

If this bear sighting is real and does return, it will be a very different animal from the last three, just as every bear market is different from the last. COVID caused huge supply chain issues and inflation not seen for nearly four decades.

Now Putin’s actions threaten energy, food and other supplies, which adds more inflationary pressures. As would be expected, this caused interest rates to rise and bonds to fall.

Though there is always the possibility we could be heading into a stagflation environment where cash is the only safe harbor, I’m not betting on it, as cash is nearly certain to lose to inflation. I’m not betting on gold or cryptocurrency either.

The fact that stocks have fallen, given the world events, is not surprising. I’m far more surprised that U.S. stocks gained more than 52% in the past two calendar years despite the endless bleak news. Bear markets are part of investing and really separate investors from speculators.

Let me be clear that I have no idea whether we will close at an official bear market soon. And if we do, I don’t know whether it will be very short, like the 2020 Teddy Bear, or more vicious than the Grizzly Bear that took three decades for stocks to recover in Japan. The odds are, of course, it will be somewhere in between.  

So, my advice is to fasten your seatbelts, grab an air sickness bag and prepare for extreme turbulence.  That said, I’m changing nothing in my portfolio and am sticking with my asset allocation target. This means I may soon have to buy stock funds, which will hurt almost as much as when I did the same thing in March 2020 when stocks fell 35% in 33 days.

Now is the time to listen to your emotions. If the anxiety and pain you are feeling is intense, odds are you were probably too aggressively invested. If markets fall close to 50% or more, as they have done twice in the past three bears, you can expect that pain to feel many times worse. Make sure you’re emotionally prepared to handle the consequences, especially if markets don’t quickly recover.

Remember, good times don’t last forever and neither do bad times. Also remember that making knee-jerk changes to your course nearly always gets you to the wrong destination. So don’t panic, stay the course and stick to your asset allocation.

Have faith that if Putin the Bear ransacks our metaphorical campsite, it’s going to move on, as all bears eventually do.

 

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is www.DareToBeDull.com. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter