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  • Investors often sell at the worst times during a bear market.
  • Bad news is everywhere, but that's when stocks can surprise you.
  • Maintaining a long-term perspective can help you make more money when the bear market ends.

Bear markets are rough. They take a toll on portfolios, and if you don’t have the proper mindset, your psyche. Research shows the pain associated with loss is twice as powerful as the pleasure related to gain. If you’re not careful, actions taken to reduce the risk of financial pain may provide short-term relief but cause long-term damage.

That’s because selling to “make the pain stop” could mean missing out on the first year of a shift back to a bull market when returns are the greatest. For example, the average return in the first year of a bull is a whopping 38%. That’s miles higher than the 12% return in the second year and the 6% average annual return over rolling 10-year periods, according to CFRA.

Similarly, missing even a few big days in the market can set you back significantly. For example, according to J.P. Morgan Asset Management, if you weren’t in the market for the ten best-performing days between 2002 and 2021, your return was 334% lower than if you’d simply bought and held.

Riding out the storm has substantial long-term benefits. So, if you struggle to keep that perspective, remember that bad news now could mean good news later.

In “Are You a Bad News Bear, or a Bad News Bull?,Real Money Pro's Paul Price explains how he uses bad news during bear markets to make more money over time. Instead of selling, he’s buying. He writes:

“The easiest, and fastest, gains almost always come well before any good news has been released…The Covid-panic low reflected horrible economic news. No truly positive news was anywhere on the horizon…That's when most traders are prone to sell, even at horribly discounted prices. Times like that make value investors salivate…The broad market bottomed on March 23, 2020 and barely took a breather through about Labor Day. September and October of 2020 were rocky, giving investors a second chance to establish nice holdings at great prices…From then on there were few let ups until around year-end 2021.”

Admittedly, that’s only one example, and the post-COVID runup was different than today because the Fed was cutting rates rather than hiking them. Nevertheless, the point stands. If you look back at any previous bear market, they all share something in common: Each preceded a bull market and, eventually, new highs on the S&P 500.

Back to Price:

“Always keep in mind that when you feel the most bummed out and the least happy to own stocks... so does everybody else…True contrarians know it's OK to feel like everybody else, but it's not OK to act like them [emphasis mine].”

And, bummed out we’ve been!

Inflation is near 40-year highs, and GDP-busting interest rate increases are making credit more expensive and harder to come by. As a result, consumer budgets are getting squeezed as cost increases outpace wage growth, and corporate margins are shrinking as demand falls while input costs remain higher. So it’s little wonder that stocks have taken a beating and investors have been reeling. In Q2, consumer and investor sentiment was terrible. Michigan’s Consumer Sentiment Survey was the worst reading since the survey began in the 1970s, and money managers' bearishness smacked of the Great Recession in 2008.

Yet, a funny thing has happened. Amid a steady stream of this bad news, some stocks started moving higher in May, and the market indexes followed suit in mid-June.

Back to Price:

“The Dow hit bottom again in mid-June of 2022. Media pundits challenged anyone to tell them why they should be buying. They asked how people could possibly not think that we'd "test the lows" once again before long…Fighting that kind of groupthink is never easy. But it pays well. The broad markets rebounded sharply since those June lows.”

Indeed, the S&P 500, NASDAQ 100, and Russell 2000 are up 13%, 17%, and 14%, respectively, since the S&P 500’s low on June 17. Those are remarkable returns considering how bad the economic data has been.

Will it continue? Who knows! Nobody rings a bell at the bottom, we’re still in a bear market, and the economy is still weakening. Without hindsight, we won’t know if the June low will be the low of this cycle for a while. Nevertheless, Price’s point stands: Markets rally when bad news is relentless. 

Is More Bad News on Deck?

In "The Next Phase of the 2022 Bear Market Could Start Soon," Real Money technician Bruce Kamich reviews the major index charts. 

Unfortunately for bulls, he doesn't like what he sees. So, another leg lower could be in our future. He writes:

"Regular readers of Real Money may remember I turned bearish on the broader market averages in early December and saw a trading rally around the middle of May. That trading rally appears to be over for the most part and I see the risks to the downside again. Traders should take appropriate action to nail down profits."

If we do get a "summer selloff," as Kamich suggests, make sure you remember Price's advice. After all, it's likely any selling from here will be accompanied by a lot of sentiment-busting news. 

The Smart Play

Managing your mindset is critical in a bear market. The short-term pain during selloffs can feel unbearable. Still, bear markets create significant opportunities because, in a rush to sell, great companies get tossed out like “a baby with the bath water.”

Perhaps, famous value investor Shelby Davis said it best when he wrote, “You make most of your money in a bear market; you just don't realize it at the time.”

The potential to take advantage of a bear market isn’t limited to value investors, either. Growth investors can use them to rotate out of second- and third-tier stocks into first-tier stocks. Long-term buy-and-holders can increase their monthly contributions so they can buy more shares in the index at lower prices. And short-term traders can profit from riding waves up and down by selling strength and buying weakness.

Admittedly, this bear may not be over. Stocks don’t go up or down in a straight line. Instead, they chop up and down. We’ve had a big run, and the third quarter has a track record of lackluster returns. So, we could pull back or worse. There’s simply no telling what happens in the near term. 

However, we can take comfort in knowing that bear markets set the stage for significant returns over the long term. For this reason, when you feel the “weight” of a constant barrage of bad news, ask yourself, “is there so much bad news that it’s becoming good news?” If so, we could be about to rally.

  • Investors often sell at the worst times during a bear market.
  • Bad news is everywhere, but that's when stocks can surprise you.
  • Maintaining a long-term perspective can help you make more money when the bear market ends.
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