A Legendary Investor's 'Bear Market Warning'... and a Few Survival Tips

It's volatility, not a new bullish trend... We're closer to a bear market than a bull market... A legendary investor's 'bear market warning' – and a few survival tips... Which sectors 'lose less'... The biggest lesson from history...

Today we're sharing another 'bear market warning'...

But before we get into the details, I (Corey McLaughlin) am well aware that the major U.S. indexes were up today ‒ around 3% ‒ so you may feel our major message is tone-deaf... But I promise you that's not the intention.

Quite the opposite... And that's why it's important.

Any investor worth listening to – if you want to make money over the long run – will tell you not to be fooled by... or put too much weight behind... a one-day swing in prices or one bit of news as an indicator of a long-term trend.

No doubt reports of a potential resolution between Ukraine and Russia, with both sides at least offering end-of-war scenarios to the other, is a good thing for the people on the ground in Eastern Europe and generally for lowering collective global anxiety.

But let's not forget the largest military invasion in Europe since World War II has just happened – and is still ongoing. Big questions remain about what comes next and, for the economy and markets... and what it all means for growth and inflation in the months and years ahead.

What our short-term trading experts are saying...

The bigger idea we can take from today's snap back in the major U.S. indexes (and pullback in commodities) is that it's simply another sign of volatility... and a reason to be diversified.

It might be an "inflection point," as our DailyWealth Trader editors Ben Morris and Drew McConnell wrote today, for higher stock prices and lower commodities prices... and it does look like a short-term "low" for stocks, according to Ten Stock Trader editor Greg Diamond.

But beyond that, we don't have a crystal ball. Greg told me today he expects choppy volatility to continue... and as we wrote last week, a big "wave" to hit stocks sometime after the Federal Reserve meeting next week. As Greg updated subscribers yesterday...

The back and forth is difficult and can bring out your emotions. Mind your position sizes, know that we have a plan, and take what the market gives you.

This market is like an earthquake... The rumbling has started and the needles on the seismograph are going wild, but we haven't had the "big one" yet.

With this in mind, let's now zoom out... and proceed with what might sound like a poor-timed bigger picture message, but really isn't, as I'll explain in today's Digest... courtesy of one of the wisest and most experienced investors on the planet.

First, we're closer to bear market territory than a bull market run...

Based on "traditional" bear market definitions of a 20% drop in prices from previous highs, the tech-heavy Nasdaq Composite Index on Monday actually entered bear market territory for the first time since the COVID-19 crash in March 2020...

Now, as we alluded to yesterday, there's not a Mr. or Mrs. Bear Market Official that tells you when a bear market starts or what qualifies. Plus, they are really only defined in hindsight, which makes predicting or preparing for them difficult.

But generally, you'll hear that a bear market is considered a 20% drop in stocks, along with widespread pessimism and negative investor sentiment... A bear market can happen across the entire stock market, or be limited to a specific sector, say tech stocks.

For our purposes today and going forward, we like what our colleague Dr. David "Doc" Eifrig considers a bear market. As he wrote in his Bear Market Almanac in 2019...

In spirit, we want to define a bear market as "a period of prolonged negativity in the stock market, of such a magnitude that you'd like to have a plan in place to prepare for it."

Put in simpler terms, if the market drops far, fast... or takes a lesser decline but over a sustained period, then that's a bear market.

Even after today's rally, the Nasdaq is still down 17% from its November 19 peak... The benchmark S&P 500 Index is off 10%... and the MSCI World Index – a measure of stocks all over the world – is down about 10%, too.

At the least, stocks are closer to a bear market than a bull.

Forget anything else...

We could be wrong, and this could be a more garden variety 10%-ish correction, but there's a lot of evidence suggesting that more losses in risk assets could come in the longer run. It's just a matter of the timing that is different throughout history.

Said another way, the COVID-19 crash was the "far, fast" variety. If what we're living through today becomes a broad bear market that's obvious in hindsight, it will be of the lesser, more sustained brand of bear.

And as we've explained this week, several reliable economic indicators – like oil soaring more than 50% in short order – also suggest we're nearing a recession. And bear markets and recessions (and inverted yield curves) typically go hand in hand in hand...

Now, this doesn't mean you should dump all your stocks today, or that stocks might not rally in the short term – they very well may – but it does mean it's worth thinking through your bear market plans – if you haven't already.

Is your portfolio truly diversified? Are you out "over your skis" in one stock or sector? Do you have enough cash on hand to sleep well at night?

And, on the other end, what stocks or sectors are you eyeing up to buy if prices drop further?

As I wrote yesterday, there are times to be aggressive and times to be cautious in stocks. This is not a time to be aggressive... yet.

It might feel counterintuitive, but you'll know it is time to buy when it feels like nearly everyone is panicking. Today, at least, that's not the case.

People are still buying today, and valuations are still high, yet nobody knows for sure what will happen with the course of the war in Eastern Europe... or inflation, two things that on their own could be market killers.

So there's still time to prepare...

Just listen to a longtime friend of Stansberry Research, famed investor Jim Rogers...

For those who aren't aware, Jim is an investing legend. Among many other things, he was co-founder of the famed Quantum Group of Funds hedge fund and he founded the Rogers International Commodity Index in 1996.

He sat down recently with our editor-at-large Daniela Cambone for his first interview since Russian forces invaded neighboring Ukraine... It's a must-watch interview. Here's a one-liner from Jim that could be made into a sign on Wall Street...

The main lesson of history is very few people learn the lessons of history.

In the conversation with Daniela, Jim talked about a scenario that might be playing out now as we write – a rally powered by hopes of a resolution to the conflict in Eastern Europe... and the fakeout (our words) that might make folks mistakenly complacent.

Jim's been notably bearish at critical times before, like 1987, 1998 and 1999, and 2008... and he is again today. Here is his bear market warning, as he told Daniela when she asked for his forecast for U.S. stocks. He said...

There will be a big collapse. If it works the way I [think] we'll have one last big rally – a blowoff, call it what you will, many stocks will really go through the roof, and then when they start going down...

Bear markets always hurt a lot of people especially the stocks that had been the strongest stocks. Go back to any big bear market and the stocks that were very strong before the bear market will go down 70%, 80%, 90% sometimes, even if the company survives.

Amazon, Microsoft in the late 90s, collapsed. The companies are still here, but the stocks that are doing well going into the bear market really get crushed.

In some corners of the market, the bear has already been out in full force...

Our friend Whitney Tilson, founder of our corporate affiliate Empire Financial Research, shared two telling charts in his free daily newsletter yesterday...

You may recall that in my January 13 e-mail, I shared a chart showing that the stock of Warren Buffett's Berkshire Hathaway (BRK-B) had outperformed go-go-growth darling Cathie Wood's ARK Innovation Fund (ARKK) since the pre-pandemic peak of the S&P 500 on February 19, 2020.

Since then, the gap has only widened, as you can see in this chart:

This next one is a real doozy. As Whitney wrote...

When the pandemic hit, few stocks were hit as hard as hotel operator Hilton (HLT), which collapsed by 60% in less than a month. Conversely, few took off like video-conferencing leader Zoom (ZM), which soared more than 400% over the next eight months.

But believe it or not, less than a year and a half later, Hilton's stock has now outperformed Zoom's since the pre-pandemic market peak, as you can see in this chart (a hat tip to NYU marketing professor Scott Galloway for flagging this):

If this compels you to agree with Jim, or even if it doesn't... it brings us to an important question.

What can you do to prepare for – or survive – a bear market, or a recession? We started to talk about this yesterday and will get into it more now...

A few more bear market survival tips...

Last night we talked about the reasons to own high-quality businesses with "pricing power" that can continue to reward shareholders despite facing higher costs (inflation). One reader, Leslie V., responded...

Really appreciated your article and totally agree. I would appreciate knowing the sort of segments you think contain those high-quality companies that will benefit from rising prices? I'm not expecting ticker symbols, just an indication of where best to look. I have already increased my holding of gold and related stocks, plus key commodities.

Again, thanks for your timely warning of the choppy times that are sure to be coming soon.

First off, thanks for the note, Leslie. We encourage any and all questions... so please send them to us at feedback@stansberryresearch.com, while noting that we can't give individual investment advice here...

Second, while it might boost our ego that you "totally agree" with us, I'm more so glad you found yesterday's discussion helpful and are thinking about the potential for more volatility ahead in the markets. That's the point we want to get across...

As far as sectors of the market to find high-quality companies in, there are great businesses in every sector. They could be candy companies like Hershey (HSY), insurance businesses, or the Software as a Service ("SaaS") stocks.

But if what you're also asking is which sectors tend to be worth owning in bear markets or may outperform others, there's not a straightforward, universal answer to be gleaned from history... If anything, as I'm about to show, the lesson is all major sectors endure losses.

That goes for high-quality stocks too. It's just the unfortunate reality and nature of bear markets and economic cycles. But here's an important point...

It's a matter of which sectors tend to 'lose less'...

Doc Eifrig and his team shared this research in their February 9 Health & Wealth Bulletin, pulled from their 2019 Bear Market Almanac. It shows the broad sectors of the market and their performances over the six bear markets (prior to COVID-19).

As we mentioned, Doc's definition of a bear market is a little different from the standard 20% drop you'll see quoted in the financial media. These numbers might not reflect what you see in mainstream analysis of past bear market performances, but as Doc wrote...

This table offered some clear lessons.

Utilities, consumer staples, and health care stocks offer opportunities to safeguard your wealth. Also, financials and technology stocks are often hit the hardest. They should typically be avoided.

Second, get ready to get greedy...

If you're looking for long-term buying opportunities ‒ and you should be ‒ you'll want capital on hand to put into the sectors that ultimately lose the most and offer high-quality stocks at relatively cheap prices.

Because the silver lining of bear markets is that they can provide tremendous buying opportunities. And many studies have shown some of the biggest gains in the stock market happen after panic bottoms. But don't just take it from me...

Back in March 2008, amid what proved to be the onset of the greatest financial crisis of a generation and a bear market that didn't bottom for another year, our founder Porter Stansberry wrote about this in our flagship Stansberry's Investment Advisory newsletter...

He wrote about how he learned to "lust" for bear markets. It's not all doom and gloom, if you have a longer-term time horizon and the fortitude to ignore everything that is telling you to sell everything.

He told a story about the emerging-markets meltdown of 1997 and 1998, which began in Asia. At one point, prices in Malaysia were about 95% off their highs and Porter recalled a financial newsletter written by someone who recommended a lot of stocks in that market...

Amid this utter devastation, this writer sent out one of the most incredible letters I'd ever seen. Sell everything, he said. He was throwing in the towel.

Reading the letter, you could tell the bear market had destroyed this poor guy. He'd bankrupted his subscribers, lost most of the money he was managing, and knew he'd spend the next several years getting sued (which is what happened).

At the time, I shared an office with Steve Sjuggerud. After reading the letter, we both looked at each other and said, "That's the bottom..."

Instead of selling, if you'd bought Asian stocks right then, you would have made a fortune. Malaysian stocks, for example, bottomed in August 1998. Only 18 months later, the most widely traded index fund in the country was up 334%.

Other individual stocks went up far more, like 10 times and 20 times. More from Porter in March 2008...

Great investments are made during bear markets. Great investors earn their reputations during bear markets. The fortune you hope to gain from the markets will be made by what you do during bear markets.

It's easy to buy and hold during good times. It is much, much more difficult to put money to work in critical situations when you have to go against the crowd and your own fears.

The same advice is true today, and always... Remember it, please.

We can't tell you with certainty if more stocks will ultimately enter a bear market...

Stansberry NewsWire editor C. Scott Garliss wrote about this yesterday... In times when market "fears" have been as high as they have – as measured by the CBOE Volatility Index ("VIX") – the benchmark S&P 500 has tended to rally around 15% over the next 12 months.

At the same time, there are a variety of reasons – another Federal Reserve policy mistake, worse inflation than most people can imagine, oil prices that don't go down significantly any time soon, a war that could spiral out of control... each contributing to lower global economic growth in general.

These are not small concerns, and many key indicators are already trending in bearish directions.

If things get worse, the amount of panic and fear will rise... you can be sure of that. But when that happens, that's when it's time to go against everything your emotions are telling you and buy more shares of great businesses at cheap prices.

In the meantime, you could consider ways to offset losses in your portfolio too...

We talked yesterday about how owning some gold is a good idea.

Many of our editors consider gold a "chaos hedge," and we've seen why lately... While many stocks have sold off the last few months, the spot price of gold is up roughly 12% since January 28, even with a 2%-plus slide today.

You can consider adding an allocation to our colleague Dan Ferris' new "10-Stock Inflation Protection Portfolio"... Learn more about that here and the reasons he's concerned about the markets today.

There are few other things you could do too. For example, over the weekend in DailyWealth Trader, Ben and Drew shared two simple ways to profit from falling stock prices.

The first is short selling. As Ben and Drew wrote...

In conventional stock buying, you try to buy low and sell high. But when you sell a stock short, you flip that around. You try to sell high first and then buy low.

Here's how it works... When you place the order, your broker loans you shares and sells them in the open market. You get the cash from the sale.

Then at some point in the future, you need to repay the loan... You need to buy those shares and return them to your broker. (This is called "covering" your short.) If you pay more than you earned from the original sale, you take a loss on the trade. If you can buy the shares back for less, you keep the difference and profit.

If you subscribe to DailyWealth Trader or are an Alliance member, you can find a training guide on short selling here and in the resources of many of our other publications.

But if short selling sounds too complicated, Ben and Drew shared another simpler idea... buying an "inverse" fund. These are funds that trade inversely to the exchange-traded fund they track.

Ben and Drew explained...

Inverse funds can be bought and sold just like stocks... or like other exchange-traded funds (ETFs). But they increase in price when the underlying asset (like a stock index) falls.

It's a way to short stocks without borrowing shares from your broker. For example, the ProShares Short S&P 500 Fund (SH) is an inverse fund that is designed to increase 1% for every 1% drop in the S&P 500 Index. The ProShares UltraShort Financials Fund (SKF) is designed to increase 2% for every 1% drop in the Dow Jones U.S. Financials Index.

When you want to buy an inverse fund, look for market sectors that are expensive relative to their history. If share prices start falling, it could be a good time to buy an inverse fund.

Keep in mind, inverse funds can work great for short-term trades... But many of them bleed value over time. (Their gains tend not to match the losses of the underlying asset.) So you should do a little research before buying an inverse fund.

There are other strategies as well. We will explore those here too and, broadly, how you can protect and grow your wealth over the long run no matter what happens next.

I say all this today not to scare anyone, but because you won't hear it in the mainstream media. Because of that, maybe you'll think we're "too early" or have poor timing with today's message... considering today's market upswing.

Well, that's the point. You want to prepare before the worst happens. When it does, you'll be happy you did.

Jim Rogers: U.S. Dollar Being Used as an 'Instrument of War'

In his first video appearance since the Russian invasion of Ukraine, investor and best-selling author Jim Rogers tells our editor-at-large Daniela Cambone what's really driving Russia's actions... how the U.S. has turned to weaponizing the dollar... and what that will mean.

"The U.S. dollar will die," and it will fall from its position as the world's reserve currency sooner than expected, says Rogers. "We're paying a gigantic price" for the actions taken by U.S. elected officials.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 3/8/22): Sprott Physical Gold and Silver Trust (CEF), Enterprise Products Partners (EPD), Freehold Royalties (FRU.TO), SPDR Gold Shares (GLD), Barrick Gold (GOLD), VanEck Vectors Oil Services Fund (OIH), Sprott Physical Gold Trust (PHYS), Royal Gold (RGLD), Telekomunikasi Indonesia (TLK), ProShares Ultra Gold Fund (UGL), United States Commodity Index Fund (USCI), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

Other than the note we already covered, we had a relatively quiet mailbag today. Let us know your thoughts, comments, questions or concerns with an e-mail to feedback@stansberryresearch.com.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 9, 2022