The stock market is down about 10% from its recent high of 1,363 (S&P 500), which was set in late April of this year. The question on the minds of many investors now is, how low can we go? The short answer is that we can go down another 10% from here and still not even reach the official definition of a bear market. Declines of less than 20% are considered by market historians and technical analysts to be part of the normal ebb and flow of prices. Once the decline reaches 20%, a new set of concerns emerges. (A decline of 20% from the recent high would put the S&P 500 index at 1,090.)
One concern would be that a decline of more than 20% in a weak economic environment could be a sign that the economy is in the process of rolling over into a new recession. There is very little evidence to support this concern as yet, but there are some signs that are troubling. If things deteriorate to the point where we believe a new recession is likely, we will notify all of our coaching clients via email, and we’ll alert our Premium members through the website. We will also change our model portfolios accordingly. But what should you do if you aren’t a subscriber or a coaching client?
One thing you can do right now is to review your portfolio and look for weakness. Ask yourself this question as you look at each of your holdings – “would I buy this stock today if I didn’t already own it?” If the answer is no, then you should consider selling it.
Another thing you can do right now is buy a little portfolio insurance. This is relatively easy to do with inverst ETFs like SDS or DPK. Ask your broker or advisor if this strategy is appropriate for you. The advantage of buying insurance – as opposed to selling your stocks – is that you avoid the additional costs such as capital gains taxes and trading costs. Once the current market turbulence subsides, you can liquidate your insurance trade by selling the ETF.
Getting back to what’s going on in the markets, until we see further evidence of a serious slowdown in the economy, or a decline of more than 20% in the stock market, we will stay invested in our model portfolios. A decline of 20% in stocks is considered a bear market. The stock market has a very good track record of predicting recessions, but not a perfect one. We would have to see confirmation of a recession in the economic indicators we follow in order to take evasive action.
We’re on high alert right now for a new recession call, so the answer to the question of how low can we go is perhaps 1,000 on the S&P 500. We’re almost half way there, but at this point there’s no real cause for concern. A new recession is just fear and speculation at this point, so stay invested, and stay vigilant.