How to Transition from a Bull Market to a Bear Market

Investing Psychology, Stocks Mar 6, 2020 / Reading Time: 2 mins
Aditya Kapdi By Aditya Kapdi Reading Time: 2 mins

Major global indices experienced the longest running bull market since the post-GFC crisis lows of March 2009 with the S&P 500 rising by more than 400% to a record high of 3393.5. However, there is always a possibility of a looming bear market which can create adverse effects for investors and their portfolios. Often, the dilemma is that individual investors may find it difficult to forecast when the markets are turning, the duration of the downturn or the extent of the effects to the stock market. That being said, it is vital that investors make the appropriate transition to cushion themselves from losses in a bear market.

One strategy is to find assets or sectors that have a high probability of increasing in price when the overall market is trending down. Investing in defensive or non-cyclical stocks is one strategy investors can potentially employ that may withstand large portfolio losses. Broadly speaking, defensive stocks generally tend to perform relatively better than the overall market during bearish markets as these companies’ revenues and earnings have the potential to hold up well. Going back to 2008, many investors enjoyed double digit returns when the US stocks crashed nearly 40%. This can mainly be attributed to the large influx of cash to defensive sectors.

Undoubtedly, the market will focus on coronavirus as a major theme for investors and as such there may be a large demand for the S&P/ASX 200 Health Care Index (XHJ) which comprises of providers of basic health-care services and biotechnology companies. The health care sector grew 0.77% for the week ending 23rd February, the highest performing sector amidst the global virus outbreak, as companies researching possible treatments to the virus realised gains in anticipation of a successful vaccine. Similarly, the S&P/ASX 200 Consumer Staples Index (XSJ) grew 0.53% in the same period as companies whose business models that are less sensitive to economic cycles experienced higher demand from investors.

During recent times of uncertainty, gold emerges as an attractive safe-haven asset with prices reaching US$1676/ounce. This should spur investors to consider gold mining stocks and to subsequently increase this allocation in their portfolio. Furthermore, the mounting expectations for a coordinated monetary policy easing by central banks should see near term gold prices rise which is further compounded by global treasury yields declining.

Overall, whilst the near term brings uncertainty and a possible downturn in markets, investors should actively transition to a strategy whereby portfolio losses can be minimised as they take advantage of sectors that generally outperform the overall market in a bear market. A possible strategy is to consider a defensive approach and invest in sectors and companies that might do well even if other sectors are losing value.

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