Investing In A Bear Market

The trying macro-environment is forcing markets into bear market territory. We dive into how to hedge your portfolio during a down-cycle.

bear market

At the time of writing, the Nasdaq-100 and S&P 500 are down -22% and -14%, respectively. Officially marking a bear market for the tech-dominant Nasdaq.

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A bear market is typically characterized as a 20% pullback in a major index.

While a large pullback that has spooked many investors, to put it in context, we are back at March 2021 levels. Still up over +80% from March 2020 lows.

Setting the Backdrop

The current macroeconomic picture continues to remain trying. We are plagued by rising inflation, rising debt costs as a result of inflation, supply-chain disruptions, and the Russia-Ukraine conflict. Consumers are getting hit hard whether its at the grocery store, on their variable rate debt or at the pump.

With central banks anticipating elevated inflation moving forward, they are gearing up for more aggressive rate hikes. The Bank of Canada hiked interest rates 0.5% a few weeks ago and the US Fed is expected to do the same. Both have been vocal about a series of several rate hikes into 2023 to quell rising inflation.

These macro-drivers show no current signs of abating and are likely to force markets lower over the next several months.

What This Means For Your Portfolio

High inflation, rising rates and global instability are not good for the markets, as we have seen in recent weeks. However there are pockets of opportunities to either shield your portfolio or seek to gain some alpha relative to the market.

📱Growth Stocks

Growth stocks (e.g. tech companies), are characterized by rapid revenue growth. They reinvest their capital to continue expansion and typically run at a loss to finance this growth. With rising interest rates, investors place a higher opportunity cost on these stocks, meaning the company needs to be growing even faster to receive the same valuation it would if interest rates were lower.

The Nasdaq has been taking a beating as a result of this as investors bake in rising interest rates. Expect further weakness in this pocket until central banks can quell inflation.

🏛Quality Stocks

Quality stocks are characterized by consistent and stable profit margins, ROE and often corner a market. During a recession, these blue-chips typically fair better because they are well capitalized and have been in existence for decades, having operated through difficult market conditions previously. Companies within this domain include banks, staples (think Coca Cola), and large industrial giants.

High Quality ETFs

🔌Utilities

Utilities are often regulated entities that provide power to customers. They have a consistent consumer base and are often considered recession proof due to their stable revenue. Additionally, with rising inflation, they often hike prices to maintain consistent margins.

Utilities ETFs

🥇Gold

Gold can be a tiring asset to invest in. Viewed as a store of value, investors often flock to it in times of uncertainty. Because it is also a physical asset, rising inflation typically help gold prices. The more difficult decision for investors is owning gold stocks or the commodity. As the saying goes: "a rising tide lifts all boats." When the stock market begins to pullback, gold companies are often caught up in the mix as well. This is due to a variety of reasons like being included in major ETFs that investors unwind, or a general unwinding of any risky assets investors may own.

Gold bullion and stock ETFs

Generally, if the market is weak it pays to own the commodity over the stock, but the gold miners do benefit fundamentally from increased gold prices.

📈Covered Call ETFs

For a quick refresher on covered call ETFs, check out our previous issue here. These ETFs can help reduce your portfolio risk by selling call options on a portion of the underlying portfolio, creating an enhanced income stream. While the portfolio may decrease in value, the additional call option revenue can offset some of these losses vis-à-vis a non-covered call product.

Covered call ETFs

Concluding Thoughts

The trying macroeconomic environment is forcing many investors to reconsider their holdings in the face of weakening tech stocks and the overall market. During a bear market, a reallocation towards more stable assets may be a prudent decision for your portfolio.

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Note: The information contained in this article is not and should not be construed as investment advice, and does not purport to be. The information and opinions provided should not be taken as specific advice on the merits of any investment decision. Investors should make their own investigation and decisions regarding the prospects of any topic covered herein.

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