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S&P 500: How To Prepare For Even More Pain

www.investing.com/analysis/sp-500-how-to-prepare-for-even-more-pain-200630583
S&P 500: How To Prepare For Even More Pain
By Francesco Casarella/Investing.com   |  Oct 03, 2022 11:50AM ET
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  • With markets fighting to stay above this year's lows, Q4 could also be a weak one for the S&P 500
  • A prolonged bear market such as the one we are facing imposes significant financial and psychological pressure on investors
  • However, we must remember that the S&P 500 has always rebounded strongly from bear markets in the long run

The ninth month of 2022 closed off as the ninth month of a painful bear market. Now, with the S&P 500 hovering dangerously near yearly lows, the odds that the downward trend will continue in Q4 remain elevated.

The fact that the bear market has lasted for so long now—along with the underperformance in the bond market—certainly imposes financial and psychological difficulties for investors, especially inexperienced ones.

Yet, except for bonds, one could argue that we are still in a context of absolute normality (and let's also remember that bonds had been trending up along with the stock market in recent years).

In fact, I'll let you in on a secret; if we didn't have bear markets, the stock market would not be offering the average compounded return of 8-9% per year.

S&P 500 Bear Markets Since 1950
S&P 500 Bear Markets Since 1950

As shown in the chart above, historically, the S&P 500 falls on average -30.2% over the course of 338 days in a bear market. Counting since the beginning of the year, we are currently at about -25% during 270 days, in line with previous cases in history.

Since we have a bear market that curiously started on the first days of the year, it is easy to compare it with other single-year historic performances, namely:

  • 1931: -43.8%
  • 2008: -36.6%
  • 1937: -35.3%
  • 1974: -25.9%
  • 1930: -25.1%
  • 2022: ...

But the most interesting point is the statistic shown in the chart below:

S&P 500 Bear Markets Vs. S&P 500 Subsequent Bull Markets
S&P 500 Bear Markets Vs. S&P 500 Subsequent Bull Markets

Source: eToro, Bloomberg

After prolonged declines, the market has always rebounded strongly, averaging a positive performance in the long run. Hence, it will be critical when (not if) the markets restart rise to be found present and well invested.

"Francis, but liquidity is finite." This is an objection that has been made to me in several analyses. Now, again, it is always an issue of strategy and planning.

I started at the end of 2021 with liquidity at 30%—because objectively, valuations were unsustainable. Therefore, I was more cautious.

As the declines began, I started to give myself targets and use my cash on strategic assets (which I intend to hold for many years). Now I am still at about 15 percent liquidity, and I have given myself very personal targets if we keep falling (see picture).

S&P 500 Weekly Chart
S&P 500 Weekly Chart

How did I choose these specific targets? Simply by looking at past bear markets. Therefore, the next entry, at -31%, coincides with the average of declines in the initial chart.

I remember that probably the fourth quarter of the year could also be weak, and so this element, in my opinion, is one of the last ones yet to be priced in the current bear market.

The important thing is always not to be unprepared and to plan for scenarios at a sensitive time like this. Then when the right time comes, you will find yourself well-positioned to reap the fruits of your investments.

Disclosure: The author is long on the S&P 500 and will buy more positions should the index continue to drop. 

S&P 500: How To Prepare For Even More Pain
 

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S&P 500: How To Prepare For Even More Pain

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Comments (14)
Emanuel Dabah
Emanuel Dabah Oct 04, 2022 5:13PM ET
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it work until it does not….
Stephen Bennett
Stephen Bennett Oct 04, 2022 2:06AM ET
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bring on 31% and it's all in then ! can't lose , never back against the US always bounces back
PM Coffee
PM_Coffee Oct 04, 2022 2:06AM ET
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True, just a question if it will take 3 years or 30 to recover.  But you should consider how trapped the fed is.  They raise - banks fail, they lower - hyperinflation.
TALLURI ANJANEYULU
TALLURI ANJANEYULU Oct 04, 2022 12:54AM ET
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AS LONG AS S&P STAYS ABOVE 3637.00 NO NEED TO WORRY.
Steve Bojo
Steve Bojo Oct 04, 2022 12:31AM ET
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This bounce will last a few days, at most, then reality will set back in
Jimmy John
Jimmy John Oct 03, 2022 9:57PM ET
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So you’re long and adding on any drop to 3450?
mike defore
mike defore Oct 03, 2022 8:56PM ET
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it's kinda funny. I use this app alit for the really time stats. but it seems the blobs or whatever u care to call their reports, act as it we are too fragile for them to just come out and say, if it wew.me, I would play yatta yatta stock this month as a call. or some kinda direction. outsid3 of that, seems pretty workers and a kinda, ( I'm not sure so u decide ) kinda feeling. and they are what I feel are extra special experts that would double or three there own income if that had any *******
Rehima Ayalew
Rehima Ayalew Oct 03, 2022 6:12PM ET
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No many😢
Joseph Obrzut
jzut Oct 03, 2022 5:19PM ET
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Like he said , market always rebounds. History proves it. So you nibble on good quality companies. No big buys but when there is blood BUY.
David Beckham
David Beckham Oct 03, 2022 1:47PM ET
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More pain more pain and die
Ale Viajero
Ale Viajero Oct 03, 2022 1:33PM ET
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There will be blood for sure.We will see SP500 at 2500 levels for 2023. If buy now, you are buying too expensive.
Gus McCrae
Gus McCrae Oct 03, 2022 1:33PM ET
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you will be waiting with cash on your table for 2500 while I will be reaping the recovery
Maurice 2
Maurice 2 Oct 03, 2022 1:33PM ET
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I think you’re Wrong. I know its bad right now , but 2500 levels for 2023 are waaaaaaay too low.
TERRY HOUGHTON
TERRY HOUGHTON Oct 03, 2022 1:33PM ET
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I'm thinking 3000 to 3100.
 
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