These tech giants are in a bear market… Why the next fall in stocks will be a doozy… Do this now ahead of the next big downturn… In the mailbag – “I LOVE the truth reporting you do…”
And the trend that has emerged from the carnage is a worrying one, if you’ve “bet the farm” on stocks.
The S&P 500 ended yesterday down 2%. The Dow ended the day down 2.3%. And the tech-heavy Nasdaq finished down 2.8%.
Sharp-eyed readers will spot a familiar – and worrying – pattern.
Once again, the Nasdaq – the index that has been leading the charge higher over most of the bull market – is now leading the way down.
And as we’ve been telling you, if the stocks that have been leading the bull market – aka the “generals” – start to break down, it’s a warning sign that the market has topped.
A bear market is most commonly defined as a 20% or more fall from a peak.
At writing, Amazon (AMZN) is down by just over 20% since its 52-week high.
Netflix (NFLX) is down 30% from its 52-week high.
And Facebook (FB) is down 35% from its 52-week high.
There’s also what you might call the ultimate “bubble indicator” – shares in high-end art auction house Sotheby’s (BID).
Shares of Sotheby’s peaked just before the peak of two of the most devastating financial bubbles of the past 30 years – the March 2000 dot-com peak… and the October 9, 2007 peak that preceded the 2008 global financial crisis.
That should come as no surprise.
When there’s a lot of money splashing around the system… and their stocks are rising in a bull market… the super-rich tend to buy more high-end art.
This translates to new highs in Sotheby’s stock… and an important indicator of bubbly conditions.
When the high-end art sales start to head south… and Sotheby’s stock follows suit… it’s a signal that the bubble has reached its inevitable conclusion.
Nor can anyone else.
No bear market indicator has perfect timing.
So it’s perfectly possible, as colleague Jason Bodner argued for here, that we’ll see further gains before this bull market finally bites the dust.
What we can say for sure is that another bear market is a matter of “when,” not “if.”
That was the core message of legendary natural resource investor Rick Rule at our first annual Legacy Investment Summit last month.
As Rick told Legacy subscribers who made the trip to be with us in Bermuda, bull markets are the “authors” of the following bear markets.
And the more attractive the bull market… the uglier the bear market that follows.
What Rick meant is that the more prices go up in a bull market… and the more expensive stocks get relative to the earnings they’re throwing off… the further they have to fall in the ensuing bear market.
And given that this has been the second-most powerful bull market in history – a 309% gain for the S&P 500 – you can expect the coming bear market to be a doozy.
Put simply, you should never be fully in stocks or fully out of stocks.
Instead, you should put only a portion of your wealth to work in the stock market. The rest should be spread across other “asset classes” – think bonds, gold and other tangible assets, cryptos, real estate, and private businesses.
How much you put in stocks depends on how much you’re comfortable seeing your portfolio fall by in the inevitable bear market.
Take a look at this chart.
It shows the nine bear markets that have struck the S&P 500 going back to the 1929 Crash. And it shows how big the peak-to-trough losses – aka “drawdowns” – were for investors.
The drawdowns range from a minimum of 28% in the 1961-to-1962 and 1980-to-1982 bear markets… to the maximum 86% loss in the 1929-to-1932 bear market.
Now, think about what kind of losses you would be okay with in your portfolio.
History shows that a 50% drawdown is within the normal range during bear markets.
If you have 100% of your wealth in stocks, that means you can expect to lose 50% of your wealth before the recovery begins.
And because losses require even bigger gains to get back to break even, you’d need a 100% rebound to recoup that 50% loss.
(Say you go from a $1 million portfolio to a $500,000 portfolio in a 50% drawdown scenario. You now need a 100% gain on your $500,000 to get back to $1 million.)
With 50% of your wealth in stocks, you limit the damage to 25% of your wealth. And you now need just a 50% recovery to get back to even.
Finally, if you have just 25% of your wealth in stocks… a 50% drawdown for stocks will translate to a 12.5% drop in your portfolio. And that requires just a 29% gain to get back to even.
Think of a sailor trimming his sails in anticipation of a storm he knows is not far off.
You want to think long and hard about how your portfolio looks heading into the next bear market. And you want to take steps ahead of time to make sure it’ll come out the other end intact.
That way, you’ll avoid a ruinous loss in the next bear market. And you’ll also still be able to profit for as long as the bull market continues. Because you won’t be tempted to panic sell all your stocks when the bear market hits.
For more on how to deal with bear markets, make sure and catch up on our Ultimate Crisis Playbook from Legacy Research co-founders Bill Bonner, Doug Casey, Teeka Tiwari, Jeff Clark, and the rest of the Legacy team.
It will not only show you how to protect your downside when a bear market strikes… It will also show you the best ways to profit on the way up again.
As a Daily Cut reader, you can access it here.
When we decided to tackle the growing threat of online censorship… and raise awareness about what’s going on… we had no idea what reception it would get from readers.
But we’d experienced online censorship first hand from Google. And we believed it was something you needed to know about.
After all, when you go down the road of censorship in society, you can’t expect freedom to survive long.
Turns out, we’re not the only ones worried about what’s going on.
We’ve received a ton of support in our mailbag, like this note from Daily Cut reader Tamara D…
I absolutely LOVE the truth reporting you do on these issues that most would like to ignore. I always look forward to your commentary and know that I will actually learn something very important about our world. Thank you so much for doing this and allowing us to share your perspective.
It’s a subject we’ll be returning to in future dispatches. So keep an eye out for those in your inbox at the usual time.
In the meantime… Are you losing any sleep over the next bear market? How do you crash-proof your portfolio? Write us at feedback@legacyresearch.com.
Until tomorrow…
Chris Lowe
November 13, 2018
Lisbon, Portugal