From Bear Market Correction to Crash: What to Do Now If We Are Heading to Rock Bottom

The “Buy the Dip” financial news teleprompter readers and the 30-year-old portfolio managers that have never seen a market crash are suddenly very silent and cannot be found. Market veterans and “hey, boomer” professionals have seen this show before. Back in 1987, the Dow Jones industrial average plunged a stunning 22% in one day. The equivalent today would be a drop on the venerable index of almost 7,300 points.
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During the period from 1929 to 1932, the stock market plummeted by 83% and many people lost everything. That debacle caused the Great Depression, which really only ended when the United States entered World War II in 1941.

In the years from 2007 to 2009, during the height of the mortgage and real estate collapse, one that brought nearly prompted another depression, the market dropped a huge 57%. When stocks finally bottomed at an ominous intraday low of 666 on the S&P 500 on March 9, 2009, the floor was put in for the longest bull market in history, one that has clearly come to an end.
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So where do we stand now? Very possibly on the precipice of a much larger decline. Monday broke the market low of 3,666 set back in June, and some across Wall Street feel we could be on our way to 3,100 to 3,200 on the S&P 500. That is an additional 15% from where we stand now.

Last week Federal Reserve Chair Jay Powell paved the way for two more interest rate increases at the last two Federal Reserve meetings this year. While it is possible that the next two increases could move back to 50 basis points, Powell has indicated the terminal or ending funds rate in 2023 could be as high as 4.60%. This could also mean small increases next year as well.

One positive is that, for the most part, consumers and businesses are still in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the past few years. The financial system is not teetering on the brink as it was globally in 2008, when Bear Stearns and Lehman Brothers collapsed and Merrill Lynch had to be bought by Bank of America to avoid a similar fate.
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One thing is for sure, the path of least resistance appears to be downward, and trying to “fight the Fed,” which has to continue to raise rates to slow the worst inflation in over 40 years, is a losing battle. There are some important things investors should consider now, as they may have to prepare for the worst:

• Do not continue trying to catch the proverbial falling knife. Instead, it may make sense to match current losses against gains, even if they are short term in nature, to help build up a cash supply. Some dry powder may come in handy down the road.

• Immediately, if possible, close out any positions on margin. For individual investors to use margin loans to buy more stock is a bad plan when times are good, especially when those margin positions are high volatility momentum stocks.
• As we have recommended for years at 24/7 Wall St., a position in gold helps to mitigate the downside. And as we noted recently, the precious metal could be headed back to all-time highs and going there soon.

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• Make sure that all the dividend-paying stock and mutual funds in personal and retirement accounts are coded to reinvest all capital gains and dividends. This allows investors to buy more shares when prices are hit hard. The third quarter is ending, and many stocks and funds pay dividends on a calendar quarterly basis.
• If you have the good fortune to come into a windfall, like an inheritance or something similar, think about real estate. While mortgage rates have increased recently, the 30-year fixed rate has risen to 6.25%, still reasonable on a historic basis, though it is the highest since 2008. Owning cash-generating rental property is an idea that makes sense now.
• If you do indeed need to look for stock ideas, look at extremely conservative ones, which are not affected as badly by even the worst-case scenarios. In other words, companies that provide goods and services that are needed all of the time, like utilities, telecommunications companies, consumer staples and real estate investment trusts.

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The 13-year bull market has been a blessing and now may end up being a curse. There were numerous drops and corrections along the way. The fourth quarter of 2018 was a good example, when over a three-month period the S&P 500 declined 18% on an intraday trading basis.

Remember that even the most difficult events in human history and investing eventually have been overcome. Whether it be health care related, war related, foreign geopolitical or domestic troubles or any other issues that have combined to cause market sell-offs.
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With COVID-19 largely in the rearview mirror, the economy in reasonably good shape (at least for now), and the Federal Reserve finally doing what it should have done when it started raising rates in 2018, at least some of the carnage may be closer to an end. The midterm elections will be hotly contested, and Republicans may win back the majority in both the House and the Senate. That combined with inflation starting to drop by 2023, and the table could be set for better times ahead.