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  • The bear market is taking a toll on investors similar to what was witnessed in the Great Financial Crisis.
  • Inventory and currency risks are becoming a common theme.
  • 5 things you can do now.

It hasn't been a fun year to be a long-only investor. The S&P 500 and NASDAQ Composite indexes have fallen 25% and 33%, respectively because investors are revaluing future earnings in light of higher interest rates.

This year's seemingly relentless slide may give long-time investors flashbacks to the Great Financial Crisis (a.k.a. the Great Recession), a similarly tough bear market to navigate. For perspective, after peaking at 1,576 in October 2007, the S&P 500 fell 58% before it bottomed at 667 in March 2009.

While bear markets create the foundation for future bull markets, enduring them is mentally challenging. Understanding how this bear market is similar to the Great Recession may offer a helpful perspective.

In "Welcome to the Jungle, It's Not Fun and Games," Real Money Pro's Peter Tchir explains the similarities and differences between the two periods. Notably, he shares the actions he's taking now with his own money to survive it. 

Here's the entirety of Tchir's piece:

"If you didn't trade or manage money during the years 2007 to 2009, then welcome to the jungle.

Many of the same issues from the Great Financial Crisis are prevalent today:

1. Politicians and Central Bankers have the ability to dramatically move markets. This was slightly more important during GFC, though central banks were biased to helping rather than adding to the misery.

2. Liquidity is abysmal, creating disproportionately large moves, relative to the news itself. This is comparable to GFC.

3. Incredible disparity of views from well-known, generally good, prognosticators. The range of opinions might be larger than during GFC.

4. Commodity bubbles. While inflation gets all the attention right now, it is important to remember that commodity prices (the CRB index) rose 58% from the start of 2006 until the middle of 2008. They fell precipitously from there, dragging stocks down with them. For now, this market seems to like lower commodity prices, but not sure how long that will last.

Additionally, we have some problems that are unique to the current environment:

1. The war in Ukraine and the ongoing nuclear threat of Russia.

2. China competing aggressively for commodities and turning more inward, no longer being the supplier of cheap goods. From a National Security standpoint (broadly defined to include technology, IP, medical equipment, pharmaceuticals, etc.) the U.S. government is pulling back, and many companies are following their lead.

It is and will be a daunting task to manage this market.

Having spent the better part of two weeks on the road, seeing large asset managers, government agencies, and corporations, two things came up consistently, and both were bothersome:

Inventories

Consumer good manufacturers of all sizes seem to be concerned not just about inventory build in their seller's channels, but their own as well. The orders for next year, which will drive economic activity, are uncertain at best. The Manheim Used Auto Price Index is now down year over year, and judging by the spam I get from auto companies, I've seen a shift from "we want to buy your used car" to "we can buy your used car and you can trade up" to "we have vehicles for sale.

FX Volatility

FX volatility is difficult for companies to manage. When currencies like the euro behave like penny stocks (mild exaggeration), companies struggle with hedging and developing business plans. Throw in the British Government Bonds (gilts), which are behaving like penny stocks, and you have more fear about how stable other developed world bond markets will remain (stable is a relative word, as every bond market is oscillating rapidly, but none, yet, are as bad as the U.K. market).

So far, central banks have shown zero ability to coordinate, and we are seeing one-off efforts to support currencies, leading to more pressure on the U.S. bond market (other countries, presumably, sell their treasuries to raise dollars to buy their own currency).

Enough Background: What to Do!

1. Stay small. Use options where possible. Take advantage of good trades, taking profits when and where possible.

2. Avoid China. No matter how cheap Chinese equities look, they remain uninvertible. That has been my view for almost two years and remains my view.

3. Nibble at energy, energy infrastructure, and Latin America. This is not an OPEC+ trade, but adapting to the fact that the "green energy" push, as we know it, is changing. Yes, green and sustainable energy will be a big part of our future, but developing baseload energy sufficient for decades as that builds out, is crucial. The only reason that I say "nibble" is that the current administration seems slow to embrace this reality. Maybe, after the midterms, we will see more progress on this. I see no future where nuclear doesn't play a more important role. However, it still seems stymied by various anti-nuclear groups (Maybe, as bitcoin struggles, some of the marketing geniuses behind that, can get behind nuclear, and we will finally see rapid development).

4. Rates. I am in the camp that the Fed has gone too far. That the Fed should be talking "wait and see" instead of hiking into data that is without a doubt slowing as higher yields are taking their toll on spending (I'm keeping an eye on auto loan delinquencies which are turning up, and home prices). I like buying bonds when the 10-Year gets above 3.90% and selling around 3.65%. We've been given one opportunity to round trip that in the last month, and I'd add to Treasuries here. It makes me queasy to say that given the Fed, Quantitative Tightening, and European debt markets, but I am too negative on the economic outlook, not to do that.

5. Semi-conductors. Maybe trade for a bounce here, but I remain nervous on this sector for two reasons I've mentioned repeatedly and a new reason:

  • How much was crypto, crypto mining in particular responsible for demand for chips? Check out eBay for used (and new) mining rigs. I think this was a large and not well-discussed source of demand.
  • How many start-ups and disruptive companies that had carte blanche to spend on tech, including semiconductors, now have to be cautious on spending?
  • Finally, and this is new, how have companies, faced with chip shortages dealt with that? I'm talking to companies that have found ways to reduce their dependence on chips. Many seem to be stepping down and using less specialized, less advanced chips, and replacing them with more chips, but basic chips. For example, instead of 10 specialty chips, they are using 20 generic chips. It is slightly less efficient, but not just cheaper, it makes their supply chain much easier to manage.

Stay focused. Have a plan. Plans will go awry in this market (as Mike Tyson once said, everyone has a plan until they are punched in the face), but a plan will help.

Do NOT panic, and do NOT put yourself into a position where you can be forced to panic. That is what will get us through this mess of a market!"

The Smart Play

Nobody knows when this bear market will end and a new bull market will emerge. Historically, every bear market has eventually paved the way to higher highs on the S&P 500. However, that's hard to remember when you're in a proverbial foxhole under fire. 

As Tchir says, now isn't the time for panic. You likely came into this bear market with a plan, now it's time to stick to it. 

If you didn't have a plan, now's a great time to reconsider your financial goals and priorities. If you're an active investor, Tchir has provided a blueprint to consider for now. 

Long-term investor without a plan? No time like the present. Sit down and have an honest and objective conversation about what you'd like your financial future to look like. Then, develop a strategy for getting there. 

That plan may look something like: Invest 10% to 15% of your income, preferably in tax-advantaged accounts, such as a workplace retirement plan or an IRA, via dollar-cost averaging. If you're unsure what investments to dollar-cost average into, consider a major market index fund or ETF, such as the Vanguard S&P 500 ETF  (VOO) . The remainder can be invested in higher-risk funds, like Vanguard's Russell 2000 ETF  (VTWO)  and individual stocks.

If you're younger, I'm envious. As horrible as bear markets can be, they provide fantastic opportunities for investors willing to look for them. Remember, time is on your side!

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