Market Mayhem: Surviving and Thriving in a Downtrend

Video1.  Markets Are Too Complacent, Creating "A Recipe For Pain (YouTube link)

During his interview with Adam Taggart, Ted Oakley emphasized the potential pitfalls of a bear market.

One thing I find about bear markets that people seem to forget is that they can come on quickly. They don't always have to crash, but they can descend rapidly. You might look up a few months later and realize how much the market has fallen. It's often when people lose their complacency and start to worry that the real pain begins. The biggest problem is that people become complacent when prices are high, and that's a recipe for trouble in the future.

Historical Bear Markets and Corrections

What does history teach us about corrections within bull markets (those that don't escalate into something more severe)? Goldman Sachs provides some insights:[1]

Table 1 presents a historical overview of bear markets and corrections in the S&P 500 since the end of World War II. We identified 14 bear markets and 22 corrections exceeding 10%. On average, bear markets decline by 30% over 13 months and take 22 months to recover to previous levels (in nominal terms). In contrast, the average 'correction' is 13% over 4 months and recovers in just 4 months.

Table 1.  Historical Bear Markets and Corrections in the S&P 500 

Clearly, this is a helpful table. While its findings may seem intuitive to some, I suspect many readers were surprised by the significant difference in recovery times between market corrections and full-blown bear markets. For those worried about near-term market weakness but not convinced of an impending prolonged downturn, this information might offer some reassurance.

Navigating Bear Markets: Strategies and Considerations

It's challenging to maintain short positions, whether you're shorting stocks, ETFs, or bear ETFs. Broker lending rates, dividend payments, and the daily price calculations of bear ETFs can all contribute to difficulties.

A conservative investor can outperform the market simply by holding cash or government bonds. For a more aggressive individual investor, the most cost-effective way to capitalize on a market downturn is to employ a strategy of buying puts and selling calls on SPY, QQQ, IWM, or similar ETFs. Alternatively, they can strategically short large, liquid, and easily borrowable stocks or ETFs after market rebounds.

Mitigating Market Downturns: Strategies from Ted Oakley

Ted Oakley of @Oxbow_Advisors  proposed a 30/30/30/10 portfolio as an alternative to the traditional 60/40 portfolio (Video 1).

• 30% should be in short-term fixed income, not long-term. You'll need to actively trade this portion.
• 30% should be in real assets like commodities and real estate. These won't be the primary growth drivers due to market instability.
• 30% should be in a mix of growth and value stocks.
• 10% should be in cash.

For the categories outside of real assets, you'll need to trade them periodically. You can't simply invest and forget about them like in a 60/40 portfolio.

Their current portfolio reflects this strategy. They have three main accounts:

• Conservative fixed income: This is a very short-term account that rarely requires adjustments.
• High-income account: This account has significant exposure to commodities like gold, miners, fertilizer, and real estate.
• Stock account: They've shifted their stock holdings to include more energy, gold miners, consumer staples, and healthcare. Healthcare is a particularly attractive sector due to demographics and recent price declines.

Overall, they aim to maintain around 50% in treasuries for liquidity. This strategy should help you weather any market storm, though they might experience some declines in a severe bear market.

References

1. Goldman's Latest Warning: 'Some Kind Of Correction Seems A High Probability'
2. Short-Interest: Being Bear Is Back In Vogue