Markets around the globe fell Monday, heightening fears U.S. markets will tumble again when they reopen this morning after the Martin Luther King Jr. holiday.
Monday’s downturn showed that international and emerging markets aren’t havens against U.S. woes as once thought.
“The stock market has just been absolutely horrible. It has been relentless. There hasn’t been a bounce,” said Paul Dickey, president of INS Capital Management in Denver.
Small-cap stocks are in a bear market, defined as a 20 percent decline from their peak, Dickey said. Mid-cap and large-cap U.S. indexes such as the Standard & Poor’s 500 are likely to soon join bear territory.
Bonds have done well in this year’s decline but aren’t the bargain they were in December. Home sales and prices continue to fall, making it risky to buy there.
And if the global economy slows as the markets seem to be predicting, then commodities such as gold and oil will suffer.
So what is an investor to do?
Bear markets in stocks average nine months. But the unprecedented credit binge and housing slump behind this economic slowdown could result in a worse-than-average downturn, Dickey predicts.
Investors who can’t stomach double-digit declines, especially those near retirement, may want to sell, go to cash and regroup, he said.
“Cash is king for now,” Dickey said.
But not all cash investments are the same. Problems in the mortgage markets have contaminated some money-market funds, requiring their sponsors to pump large amounts of cash into them, he cautioned.
Sam Jones, president of All Seasons Financial Advisors in Denver, expects some great buying opportunities to emerge soon, but he says those who feel lost should pull off the road.
“When you feel uncertain, you might find it comforting to step away from the markets and map out a plan of action with contingencies. It’s sort of like stopping at a gas station and asking directions when you’re lost,” he told clients.
Waiting is probably the best strategy in a bear market, but more-aggressive investors who think the downturn is still in its early stages have other options.
Several new mutual funds and exchange-traded funds have made it easier to profit as stock values fall in a wide variety of indexes, including emerging markets and small-cap stocks.
Short funds, especially ultra- short funds that use leverage to boost their returns, have done exceptionally well this year.
The ProFunds UltraShort Emerging Markets Fund is up 23.13 percent year-to-date, while the UltraShort Russell MidCap Growth ProShares fund has returned 30 percent.
“It is a cheap way to insure your portfolio, but use the funds with great caution,” Dickey said.
For one, stocks can rally wildly even in a bear market, causing short funds to suffer huge losses over short periods.
Not all advisers recommend selling and waiting on the sideline.
“If you’re not out by now, it’s too late — sit tight and wait for the corrective movements to pass,” said Tim Cebulko, a partner with St. Nicholas Private Asset Management in Florida.
Cebulko said the outlook will clear up in the next three to six months and that plenty of bargains will be available.
“This will be more painful the more you look at it, so find ways to avoid looking at the value of your account,” he said.
Given the severity of the decline, Jones predicts a typical bear-market rally off a near- term bottom. Also, expect shaken investors to use any rally to unload their holdings.
Investors wishing to invest in more defensive industries should consider health care, telecommunications, utilities, and leisure and consumer staples, advisers recommended.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
Where to put your money
Although the time to prepare for this downturn was in the third and fourth quarters of last year, investment managers say investors still have time to play defense.
If you’re still working: Working-age investors who are putting money into a retirement plan should continue to invest into the decline. The bear market that started in 2000 provided huge bargains as it ended in late 2002. Emerging markets could prove the tech stocks of this downturn with opportunities appearing after very large declines. Shorter-term, look to more defensive industries and stocks paying dividends, which become a more important source of returns in bear markets. More active and veteran investors may want to consider funds that short the market as a form of insurance.
If you’re ready to retire: Older investors may want to invest more in cash and bonds if they are uncomfortable with the declines in stocks. With a yield of around 3.6 percent, the 10-year Treasury bill isn’t doing much better than inflation, however. Expect bond prices to decline once stock markets rally. Some struggling lenders are offering higher rates of return on certificates of deposits, but tread cautiously. Also, watch out for money-market funds concentrated in mortgage-backed securities.
Aldo Svaldi
