Another Bear Market: Is It Time to Buy?

Every exit is an entrance somewhere else.

~Tom Stoppard

So the markets have really taken it on the chin lately. I read a blog post via Twitter a week ago that said it was a great time to be greedy. It was widely retweeted by many in the personal finance blogosphere. It’s just the kind of confirmation they wanted to hear, but that advice hasn’t worked out too well – at least for now.

I’ve seen plenty of folks chomping at the bit to buy more stocks as prices plummet. Those dividend yields get a lot juicier as the price of the underlying stocks drop! Of course, there’s also room for them to get even more attractive, or to be cut if the economy continues to sputter.

Given the tremendous diversity of opinions out there, I thought it might be a good time to do another Bulls vs. Bears wrap-up. Let’s take a look at the case for buying vs. selling stocks. Most of you already know that I believe we’re in a secular bear market, but I’ll throw that out there in advance so that new readers know that I’m not without my own bias. 😉

The Bear Case

Commodities Collapse: Oil, gold, coal and especially copper have taken a real beating as we’ve entered a new bear market in Canada and the U.S. as well as many other parts of the globe. Many point to the commodities collapse as a sign of economic weakness and problems in China. More on those below.

China Worries: Jim Chanos and many others have been warning that China’s real estate market is a bubble waiting to burst for quite some time. They argue that there’s a lot of debt hidden at the local government level in China. So while the world is fretting over the sovereign debt of Eurpean PIIGS, another time bomb is ticking further to the East.

Recession Is Here: The ECRI (Economic Cycle Research Institute) just announced that the U.S. Economy Is Tipping into Recession. Some would say this is just a continuation of the balance sheet recession we’ve been in since the financial crisis of 2007 – 2009.

Valuations Are Not Attractive Enough Yet: Doug Short looks at the P/E10 ratio and observes the following:

“the latest P/E10 ratio is approximately at the 75th percentile. A more cautionary observation is that when the P/E10 has fallen from the top to the second quintile, it has eventually declined to the first quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its eleventh year.”

Governments Will Act: The presumption among bears is that the political bureaucracy will try to look like it’s doing something, but will just keep doing the same things it’s been doing so far – which obviously have not worked and have likely made things worse. This toxic combination of prolonged ineptitude and impotence may give rise to more civil unrest as it dawns on average citizens that the trillions of dollars of relief they gave to the banks in the last crisis fixed nothing. (If you still don’t understand how this happened, please take a look at The Great Bank Robbery or Banking’s Self Inflicted Wounds.)

The Bull Case

Sentiment Too Bearish: Obviously, the most glaring case for buying right now is simply the amount by which prices have already fallen. Yesterday’s sharp turnaround from deeply oversold levels had the feeling of a market that had just gone too far too fast.

Valuations are Attractive: Some see the recent fall in prices as a great reason to buy more. They view stocks as “on sale” and just like their favourite discounted cereal, they’re going to buy more. Given Doug Short’s commentary, I’m guessing the bulls are using different metrics.

Companies Are Flush with Cash: The market concerns are centered around sovereign and bank balance sheets. That doesn’t mean that companies who are executing their strategies well can’t thrive. The best companies will be insulated and many of them raised a lot of cash in the last crisis.

Governments Will Act: Bulls aren’t sure exactly what kind of rabbit governments will pull out of their hats, but they know that when the announcement comes, shorts will run for cover and buyers will run over each other trying to get back into the market. Again, yesterday’s late day rally seemed to arise from a rumour that a coordinated plan to recapitalize European banks was on the way.

China Will Save Us: Chinese growth may slow, but will pick up at some point, leading commodities and markets higher.

My 2 Cents

I can understand why many investors might be confused and frustrated at having to deal with another cyclical bear market so soon after the last one. Then again, that’s what happens in a secular bear market. It’s interesting to note that bulls and bears share some of the same bullet points, but have very different takes on them. A bull would look at the image for today’s article and see someone running toward the entrance. A bear would probably see someone heading toward the exit. I guess it depends on the context and on your own perspective.

It’s theoretically possible for both the bulls and the bears to be right. It all depends on your time frame. China may indeed slow down. Markets may crash. But even if they do, those with a very long term bullish thesis on China may be willing to deal with that.

Business Insider posted a chart on Tuesday For Those Who Don’t Believe History Repeats Itself. It shows that the S&P 500 close on October 3rd of this year was identical to the close on October 3rd of 2008. There were many calls to be greedy at that time as well. As most of you know, the S&P subsequently fell to 666 in March of 2009 before roaring back to its most recent peak around 1370.

So is it time to buy or not? The bottom line is that the answer to that question is always the same: It depends. It depends on where you’re at with your personal investment plan. Your plan should be based on your age, risk tolerance, debt levels, ability to set aside extra income and how much money you already have invested.

You may have a passive plan that says you stay invested no matter what because you believe markets will be higher by the time you need to retire. You may have very little allocated to stocks because you’re just beginning to save or because you lost confidence in the markets after the last crash. At this point, you may feel like need to make a call on whether you want to enter or re-enter the stock market – or not. That’s not an easy call to make. Next time I’ll tell you about how I’m handling it.

How are you handling the market volatility?

Written by Kim Petch

12 Responses to Another Bear Market: Is It Time to Buy?

  1. I recently bought in at the 20% off recent peak mark and am now fully invested. If things drop another 20%, I might do a little leveraged investing. Hopefully if this is a bad bear market, the bottom won’t be much lower than 40% – but you never know!

    I’m interested to hear what you’re doing in your next post!

    • Your approach is a lot more aggressive than mine. I would never use leverage. Still, it sounds like you’re fully aware of the risk of a more serious or prolonged bear market here and you’re willing to take the risk in hopes of bigger rewards. I’m assuming you have a pretty long time horizon. I hope your strategy works out well for you and that mine doesn’t put you to sleep! 😉

  2. Predicting the stock market(s) are like predicting the weather:

    The only thing you can do as an investor is get some clothes for all seasons.

    Personally, when things tank, I buy. When equities are down, I buy. When equities are high, I buy bonds. With many equities being down, I’m buying ETFs and dividend-paying stocks.

    • True enough Mark. I like the idea of buying when markets fall, as well as incorporating some income-generating ETFs. We all like to buy low. The perennial question is always “How low is low?” Is the S&P a bargain at 1080? Does that mean it can’t hit 700 again?
      Some folks are better at sitting tight than others. It’s important to know which camp you’re in before you put your money down. It sounds like you’re one of the patient ones. Best of luck with your strategy! 🙂

  3. indicator i see all ports up and down the west coast doing way below christmas rush levels this time of the year which leads me to believe that retail sales will be dismal this year
    my observation

    • There does seem to be growing evidence of the economy slowing again. That won’t help market confidence or corporate earnings. The question is how long and how deep will this new slowdown be?

      Thanks for the info! 🙂

  4. The difficulty in predicting the stock market is that it’s a leading indicator, so there aren’t many signals that can tell us when it’s about to turn around. A lot of things that might seem like reasonable indicators for the economy just tell us where the stock market was earlier.

    • I guess that’s the problem we all face as investors. Whenever we buy, there’s always a chance we might lose money and it’s not easy to tell how likely it is that those losses will eventually be recovered. Then again, we hate to “miss the boat” as well. We all have different ways of navigating the risk/reward continuum.

      Thanks for your input Value Indexer! 🙂

  5. Interesting post… I tend to “buy the rise” and then place stop loss orders so that if it drops and the correction continues (like it did in 2008), I protect my capital. If it continues to rise, cha-ching, cha-ching.

    • I love that approach. It makes a lot more sense than a lot of the other stuff I read. Great risk management Doc! 🙂

  6. I prefer a balanced approach, look at the 3 month and 6 month stock price, if both are down, wait. I only buy if both are flat or positive. Never ever buy down… it killed me with the Nasdaq.

    Sell when you see a flat spot of about 3 months, sell enough to balance your portfolio. keep the same amount in each stock, and start moving some to short funds like and S&P short ETF or Dow short ETF.

    And remember, on every stock, 20-30% stop losses, adjusted on the way up.

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