Things to remember in a Bear Market - July 2

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dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Things to remember in a Bear Market - July 2

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Over the last three days I've taken a hard look at each company in our Sweet 16 Growth Portfolio.
> They are all going to report strong Q2 results and they are all generating a lot of free cash flow.
> Most of them are now paying dividends and funding share repurchase programs.
> They are all paying off a lot of debt, which makes the equity more valuable.
> None of them have any near-term debt problems and some are nearly or effectively debt free.
> None of them are trading at excessive multiples of operating cash flow. In fact, the group is trading at less than 3X operating cash flow per share. Upstream companies of this quality should be trading at 6X to 10X operating CFPS.
> This world runs on oil, natural gas, NGLs and coal. NOTHING is going to change that in the foreseeable future.
Updated forecast/valuation models for each of the Sweet 16 can be found on the EPG website.
I still have five more (MTDR, NOG, OVV, PDCE and SM) to finish today.

Below is a note from Mitch Zachs that I recommend that you read carefully.
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3 Key Reminders for Navigating a Bear Market by Mitch Zachs 7-2-2022

With the U.S. equity markets hovering in bear market territory, now is a crucial time for investors to keep a steady hand. Down markets can cause even the most experienced investors to make rash, market-timing decisions that sometimes pay off – but usually don’t.

The average length of a bear market is about 9.6 months, which suggests the markets could remain choppy and unpredictable for the foreseeable future. Here are three key reminders to help readers navigate this period.

Resist the Urge to “Do Something”

I will not predict how long this bear market will last or how deep it will go, but I can predict media narratives: they will remain negative for some time.

When investors see negative media coverage at the same time as a market selloff, it almost always creates an urge to “do something” in response, whether that be trimming equity exposure or selling out of stocks altogether. On the other side of the spectrum, investors may see intense selling pressure as a signal to “buy the dip” or to move more aggressively into battered-down categories of stocks. Neither impulse is a good one.

Selling out of stocks once the market is already in bear territory means locking in losses and increasing the likelihood that an investor is on the sidelines once the market mounts a recovery – which it eventually will. Approximately 34% of the market’s best performance days have taken place in the first two months of a new bull market , and we only know the new bull market has begun with the benefit of hindsight. Selling out of stocks and waiting for confirmation that a new bull market has arrived almost certainly means missing the first several months of the new bull, which is a crucial time to be invested.

Remember That Bear Markets are Factored into Return Expectations

Most long-time equity investors know that the historical returns of U.S. stocks fall in the +8% to +10% range depending on the time period analyzed. But we sometimes forget that these expected, over-time returns factor in bear markets – even very significant ones like the 2000 tech bubble and the 2008 Global Financial Crisis. I still do not believe we are facing down this type of bear today – the U.S. jobs market is still historically tight, household finances and the U.S. consumer are still healthy, and corporate profit margins are high. I believe sentiment has fueled declines more than fundamentals have.

At the end of the day, an investor’s asset allocation should be established based on return expectations needed to meet a certain set of goals and objectives. If stocks are part of the asset allocation, which they usually are, then just remember that bear markets are always factored into your return expectations.

Participating in the Rebound is Now the Top Priority

On average, stocks decline by -36% during a bear market. While that feels like a very significant loss, it pales in comparison to what is gained during the bull markets that follow. Stocks gain an average of 114% during bull markets, which also last an average of 2.7 years. Bull markets are longer and stronger than bear markets.

Once the market has crossed into bear market territory, the next 12-months return for equity investors has almost always been positive. The two exceptions since 1950 were the tech bubble bear market in 2001 and the Financial Crisis bear in 2008. Even with those two instances factored in, the median 12-month return for the S&P 500 following a bear market has been +23.9%. In other words, being invested once the stock market crosses the -20% level has paid off consistently throughout history.

The issue is that there is no way to know when the market will stage its strong recovery, though history does tell us that it usually happens in close proximity to the scariest down days. Here’s a key stat to remember: over the last 20 years, 70% of the stock market’s best days have occurred within two weeks of its worst days. This speaks to the perils of trying to time exit and entry points during heightened volatility like we’re seeing right now. Doing so means potentially – if not probably – missing out on the market’s best rallies that every equity investor needs to drive investing success.

Bottom Line for Investors

We know throughout history that bull markets follow bear markets – there have been 26 bear markets and 27 bull markets since 1928, and the bull markets have always recouped the losses and driven the market to new highs. In 92 years of stock market history, bear markets have taken up 20.6 of the years while the rest have been rising markets. According to historical data, stocks go up 78% of the time.

All that to say, stay patient here. While we cannot know when the new bull market will begin, history tells us that it will start before anyone knows it, and that some of the best gains will happen in those early days. Investors should not be on the sidelines when that happens.

Instead, I recommend that investors continue to protect their investments by focusing on key data points.
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MY TAKE: I have personally been shifting my energy sector investments into companies that pay very good dividends. There are some good choices in our High Yield Income Portfolio. I've worked hard to find companies that will thrive during this energy crisis and most of them should be increasing dividends soon. The list is on page 10 of my June 20th newsletter. Profiles on each company can be found under the High Yield tab on our website.
Dan Steffens
Energy Prospectus Group
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