We're Already in a Bear Market; You Just Don't Realize It Yet
It's been a rough month for investors with the Dow Jones Industrial Average swooning around 1,000 points from its all-time high and the more volatile Nasdaq Composite losing very close to 10% of its value. This dip has some investors wondering whether or not this correction is just another in a series of small corrections we've endured since March 2009, or if this could be the long-expected correction that sends stocks markedly lower.
Regardless of where the stock market moves from here one thing rings true for a lot of investors whether they realize it or not: we're already in a bear market.
Believe me, we're in a bear market
Right now you're probably thinking to yourself, "How can we be in a bear market if the Dow, S&P 500 , and Nasdaq are down between 7% and 10%?" Traditionally, a bear market is defined as a correction of at least 20%, and it's been years since the overall market indexes have delivered that sort of swoon. But dig beyond the surface of America's largest companies, to the small and midsized businesses that President Obama has described as the backbone of this country, and which aren't necessarily reflected in the Dow or S&P 500, and you'll see a wave of skepticism.
Utilizing The Motley Fool CAPS Screener I ran a screen this past week that excluded companies with market valuations smaller than $200 million and looked at how many of those companies were at least 20% below their 52-week high. The results were shocking to say the least. Out of 3,606 qualifying stocks, 1,673 were 20% or more below their 52-week high. In other words, 46.3% of those stocks are currently in a bear market. Among small-cap stocks (those valued between $200 million and $1 billion) the percentage was even higher at 58%.
Why the market could head lower
In reality, there are a number of possible reasons why the stock market is currently in a funk and may remain in one for the foreseeable future.
First and foremost, short-term traders, both the kind you'll find on Wall Street and the type scalping pennies at home on their computer, are known for being emotional creatures, which leaves them susceptible to overreactions as we could be seeing right now. When a good chunk of programming on CNBC is devoted to the "market plunge" it can create a cascade effect from the analysts they interview down to individual traders that can exacerbate market moves to the downside. Rather than taking a long-term view, some investors choose to formulate their trading strategies based on each day's current events. This type of emotional trading can lead to wild swings in the stock market as is evidenced by the doubling in the S&P 500's volatility index, known as the VIX, over the past month.
Secondly, energy stocks have taken it on the chin as oil's per barrel price has dipped by roughly 20% and Saudi Arabia refuses to reduce their own output, thus adding additional supply pressures in the United States. While lower prices at the pump are great news for consumers, lower oil prices could hamper oil and gas companies' desire to boost production. Additionally, lower oil prices also imply a lack of demand which can be viewed by investors as a disconcerting sign that a global growth slowdown may be expected.
Third, there are multiple global growth fears from regions of the globe that are being counted on to "keep the hamster running on the wheel." For instance, China's real estate investment growth rate has dropped dramatically over the past seven months, which is significant since Bloomberg estimates that China derives 16% to 20% of its GDP from real estate growth. The potential for a China GDP slowdown is becoming quite real, which has U.S. investors worried.
Finally, Ebola fears could take their toll on economies around the globe as tourism dollars spent could drop in select countries being affected by this disease, and government expenditures to contain Ebola could be quite costly.
The one thing you should do right now
The recipe for a traditional bear market in U.S. indexes is certainly there: fear, short-term thinking caused by news-driven events, and weakening commodity prices.
But the path to success during a bear market is also readily apparent. If you want to be successful the one thing you have to do right now is stick to your long-term investing thesis. Just because the stock market throws a few stones on the roadway to retirement doesn't mean you have to hit the first exit you see.
"How do you stomach these wild market vacillations," you wonder? The answer can be found in selecting high-quality businesses that, in many cases, pay out a consistent dividend and have management teams you can trust. As The Motley Fool's co-founding brothers, David and Tom Gardner, often advise, seek out high quality and disruptive companies that you're proud to tell people you own.
What are some examples of innovative and disruptive companies? How about Apple for starters. Sometimes you don't need to look under a rock to find great companies as they will usually rise to the top, just as Apple has. Apple has been a pillar for technological innovation for more than a decade, completely transforming the way we and other businesses connect with each other through our music, the Internet, and eventually the cloud. Apple has an astronomical $164.5 billion in cash and cash equivalents as well, which is the starting point that allows it to pay out $1.88 per year, or nearly a 2% yield.
Need another great company? How about Johnson & Johnson , which gives investors three ways of taking advantage of an expanding health care environment. Investors are privy to a stable and inelastic consumer products division that is seeing strength in overseas markets; a medical device and diagnostic segment that should see gains over the long-term due to Obamacare as fewer uninsured people will be more likely to get elective procedures done; and, finally, its pharmaceutical division, which has introduced more than a dozen new drugs since 2009 and has more than doubled its closest competitor in terms of new drug sales between 2009 and 2013. It doesn't hurt, either, that J&J has a 52-year streak of boosting its dividend.
Whether it's Tim Cook at Apple or Alex Gorsky at J&J, you know these are CEOs who put shareholders first, take pride in their business, and consistently keep their companies on the cutting edge of innovation. If you can find similar companies for your own investment portfolio then bear market or not you'll likely be on the path to outperform.
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The article We're Already in a Bear Market; You Just Don't Realize It Yet originally appeared on Fool.com.Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends Apple and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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