The Next Bear Market

It is time to plan for the next bear market and recession.

I’m not predicting that either is imminent. In fact, the reliable lead indicators of recessions aren’t issuing any warning signs yet.

The best time to plan for bear markets and recessions is when they don’t seem to be on the horizon. Most people wait until we’re already in bad periods. Then, they decide which actions to take. We haven’t seen a significant market decline since 2009. Many people forget what that was like and are becoming complacent.

The major problem with waiting until bad times happen before coming up with a plan is that emotions are likely to rule your decision-making. That’s why too many people sell near the bottoms of bear markets and corrections.

There’s also research that concludes during good times people underestimate their risk aversion. During bull markets when their portfolios are doing well, these people say they’re long-term investors and can ride out significant market declines. They know the markets will bounce back.

But once the same people are experiencing bear markets or corrections, their risk profiles change. Suddenly, portfolio declines are a big deal. They worry that their investments won’t recover.

One good exercise is to look at your current investment balances and mark them down for a correction or bear market. How would you feel if next month the accounts are down 10% or 20%? Don’t use percentages. Calculate what the losses and the new balances would be in dollars. Write down the numbers as that makes them less hypothetical. Would you be willing to give up some potential gains over the next year or so to reduce that potential loss?

You prepare for bad times with risk management and a margin-of-safety approach during good times.

You want to avoid assets that already have all or most of the good news reflected in their prices. Look for investments with lower valuations. Right now, it appears to me that U.S. stock prices reflect a lot of good news while emerging market and European stocks still are priced for poor economic growth.

You also need balance. Don’t set your portfolio based on one economic or investment outlook. You almost always want to own some investments that are going to preserve capital when others head south.

Also, decide now the data or events that will trigger a change in your portfolio. You don’t want emotions or the latest headlines to determine your actions, and you don’t want to act in a panic. Consider the indicators you want to follow and when they’ll tell you to make changes.

Enjoy bull markets and economic growth while they last. But remember that preserving your capital and gains is just as important as earning them in the first place.

The Data

The recovery in manufacturing continues, according to the Kansas City Fed Manufacturing Index. It rose to 11 from 8. That’s below the high of a couple of months ago, but is one of the highest readings in the last four years.

Consumer Sentiment, as measured by the University of Michigan, declined in the mid-month preliminary assessment. It’s down to 94.5, which is the lowest level since the November election.

The economy should continue its steady growth, according to the Index of Leading Economic Indicators from The Conference Board. The index rose 0.3%, and last month’s number was revised down to 0.2%.

Housing data continue to be generally positive but a little weaker than the year’s strong start.

Housing starts were down, with both single-family homes and apartments falling. Even so, over 12 months, single-family home starts are up 8.5%. That’s a strong number, and the final for 2017 probably will be decent. Apartments had a boom after the financial crisis, and building new ones should be slowing anyway.

Existing home sales increased 1.1% in May. That’s a solid increase and much better than last month’s decline that was revised lower to 2.5%. In addition, the sales increase came with a 3.2% median price increase. In the past 12 months, sales of existing homes rose 2.7% and the median price is up 5.8%.

Also, home prices increased 0.7% for the month, according to the FHFA Home Price Index. That puts the 12-month increase at 6.8%.

The bottom line is that sales of both new and existing homes have been up and down during the first half of the year, but prices are increasing. Higher home prices give consumers more confidence and also are leading to higher “cash-out refinancing” of mortgages, something we haven’t seen much of since the financial crisis.

New unemployment claims rose 3,000. That’s a modest change and leaves all the new claims numbers near historic lows.

The Markets

The S&P 500 declined 0.07% for the week ended with Wednesday’s close. The Dow Jones Industrial Average was the only stock index with positive returns for the week, gaining 0.19%. The Russell 2000 lost 1.28%. The All-Country World Index fell 0.52%. Emerging market equities dropped 0.67%.

Long-term treasuries gained 1.08%. Investment-grade bonds rose 0.17%. Treasury Inflation-Protected Securities (TIPS) fell 0.16%. High-yield bonds gave up 0.51%.

The dollar rose 0.62%.

Energy-based commodities lost another 2.51%. Broader-based commodities lost 1.79%. Gold dropped 2.61%.

Bob’s News & Updates

Join me at the MoneyShow San Francisco, August 24-26, along with dozens of other speakers. I’ll be making three presentations August 24-25. For free registration and other details, click here.

IRAs are among the most valuable assets most people own. That’s why I recently conducted a webinar, IRA Changes & Strategies You MUST Know. It’s one of my most popular and important presentations. Find out more here.

If you’re retired or retiring some day, you should read my latest book, the revised edition of “The New Rules of Retirement.”