How to invest in a bear market as S&P 500 is slightly above the threshold
After months of paying "full price" for stocks during the recent bull market, investors have the chance to go bargain hunting.
Target shed more than a quarter of its value over two days, and Walmart has lost nearly one-fifth of its value since Monday. Both stocks plunged after reporting much weaker quarters than expected. CEOs of the companies said inflation and inventory buildups were to blame.
Target and Walmart aren't isolated cases – the S&P 500 is approaching bear market territory for the first time since the onset of the pandemic. This comes after almost eight consecutive weeks of losses.
The bear market could usher in several monthslong "Black Friday deals," but many investors probably won't even look at them, said Ryan Detrick, chief market strategist for LPL Financial.
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"The stock market is the only place things go on sale but everyone runs out of the door screaming."
That's a big mistake, he said, adding that "after every bear market in history stocks will eventually come back and make new highs."
How to make a bear market shopping list
Shopping for stocks should ideally "be no different than when you go to the grocery store," said Dave Grecsek, managing director in investment strategy and research at Aspiriant. "You weigh what you're going to buy and how much it's going to cost. You never really just grab something off the shelf and put it in your cart."
One metric investors often use to evaluate if something is over or undervalued is the equities' price per earnings ratio, or P/E ratio. That ratio is useful only if you have something to compare it against. Oftentimes a good point of comparison is the P/E ratio for the S&P 500, which currently hovers around 17.6, according to a Factset analysis.
If a stock's P/E ratio is above that, it's probably overvalued, but if it's below that it may be undervalued.
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Generally speaking, the longer you can hold on to your bear market investments, the better, said Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management.
In any given year, "the range between the worst-case outcome and the best-case outcome is enormous," but if you hold for five to 10 years, "that range of outcomes compresses dramatically."
Timing the (bear) market
When you're booking a flight, it's impossible to know if you're getting the absolute lowest fare possible. Sure, you can hedge your bet using a plethora of airfare trackers, but nothing stops prices from falling even more after you purchase your tickets.
The same applies to the stock market.
"You'll never (know when you) hit the bottom, so it's not wise to even try and anticipate to do so," said Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo.
It's not inconceivable that the roughly 19% drop in the S&P 500 is the bottom. There have been four such instances where S&P 500 narrowly avoided entering bear market territory in the past 50 years, according to Detrick's analysis.
One way to ease some of the anxiety around timing the market is to set up buy-limit orders for equities "at a price you think is just insanely attractive," Stucky said. Your brokerage firm will automatically purchase an asset for you if it falls to your selected price.
Stocks to buy during a bear market
Because bear markets almost always occur alongside a recession, it's best to position your portfolio accordingly, Cronk said.
In past recessions, health care, utilities, consumer staples and energy have performed best.
Grecsek said he's bypassing technology and communications stocks because he believes they'll probably fall further if the economy falls into a recession.
But putting a possible recession aside, Detrick advises against "chasing shiny objects."
"A lot of investors ignore things like materials and energy because they weren't as popular this time a year ago versus stocks like Peloton and Netflix."
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here