Fears over a recession and bear market grew substantially on Monday this week as the S&P 500 lost 3.9%, leaving the index down more than 20% from its high in January.
What is a Bear Market?
The drop sent the S&P 500 into a bear market for the first time since the onset of the pandemic. A bear market is typically marked by a price drop of 20% from highs and signals prolonged and consistent declines with the majority of stocks experiencing losses.
Investors tend to be more risk averse in bear markets with many taking assets out of the market out of fear of further declines. Bearish runs can last for months or years even but are different from simple corrections that often last less than two months. The biggest problem for investors though is that it is difficult to tell when markets are rebounding from a correction or bearish market until the recovery is already well underway.
What are the Signals This Time?
The more than 20% drop in the S&P 500 in 2022 officially marks a bear market, but doesn’t signal whether it's just beginning or coming to a close. Primary concerns over the first half of 2022 for investors have been sustained high inflation, continued supply chain disruptions, tightening monetary policy, and international affairs to name just a few.
Russia’s invasion of Ukraine and the subsequent sanctions levied against Russia only exacerbated price pressures as fuel costs have surged as a result. Meanwhile, quarantine measures levied in major cities in China further hurt supply chain issues as factories were closed again due to China’s zero-COVID policy. Finally, the Federal Reserve has been tightening its policies with substantial planned interest rate hikes to fight against surging inflation as overall prices have risen 8.6% year-over-year according to the latest CPI report.
That’s just how markets got to this point, but the bigger question now is when will stocks recover and investor optimism grow once again? Inflation is of central concern and traders await the Fed’s meeting to see whether the central bank decides on a 75 basis point increase or sticks to its plan for 50 basis point hikes.
Markets are pricing in an overall 175 basis point rise by September with the Fed having to balance fighting inflation and sending the economy directly into a recession. Unemployment remains low but growth is slowing down with real GDP dropping in the first quarter of 2022 and many businesses warning investors of slowed growth going forward. Although not all firms are struggling with the current economic state of affairs.
Who is Bullish in this Bear Market?
Most companies are going along for the ride downhill on this bearish run with a particular focus on everyone’s favorite tech and cyclical stocks such as Apple (AAPL), Microsoft (MSFT), Meta Platforms (META), Alphabet (GOOG), and Amazon (AMZN). All those big firms have seen their stock prices fall at least 26% this year with Amazon and Meta performing the worst with shares dropping 39% and 51%, respectively, in 2022.
While discretionary stocks haven’t done great so far this year, more defensive staples have outperformed in this bearish run as would be expected. Coca-Cola (KO) is nearly flat year-to-date while Pepsico (PEP) and McDonald’s (MCD) are down “only” 10% each. Meanwhile, a big surprise has been Kroger’s (KR) 11% rise so far in 2022 while other similar supermarket stores haven’t fared as well. Walmart (WMT) and Costco (COST) are both down more than 17% this year while Target (TGT) has crashed 39% following multiple guidance cuts.
Walmart and Costco would typically be great picks during a bearish run as discount stores selling non-luxury goods would perform well during tough times. Costco at least had a long bullish run following the pandemic and still sits far above where it was before the outbreak. Meanwhile, Target is an intriguing choice for many investors looking for good value as the stock may have been oversold with it currently having a P/E ratio of roughly 12 which is far below its long-term average and significantly less than the current S&P 500 PE-ratio of 18.89.
Outside of more defensive stocks and discount chains, the real winners so far this year have been energy firms. It turns out surging fuel prices are good for fuel producers with the likes of Exxon (XOM), Chevron (CVX), and Phillips 66 (PSX) all up at least 40% this year. Additionally, the war in Ukraine is sadly looking like it will be an ongoing battle with no signals of it ending soon. A reality that is going to negatively impact consumers around the world in addition to of course those directly affected by the tragedy.
Wrapping Up
A bear market is no fun for investors except for those who enjoy betting on equities falling or are looking to buy into the market at a lower price. Taking advantage of bearish runs is extremely difficult and it often makes more sense to simply rebalance a portfolio or hold positions so as not to sell at the low and buy back in at a higher price.
No one knows for sure when this bear market will end or what stocks might be the biggest winners a year from now. Perhaps energy stocks have realized most of their gains from sanctions and maybe now is the perfect time to buy back into tech stocks while they are trading far below where they were six months ago. Whether in a bull market or bear market many of the fundamentals stay the same, choose assets that fit personal goals and are firms you believe will succeed going forward.
