The bear around the corner has been in hiding now for several years. Even the CEO of TMF has had some bear sightings and has proclaimed he’s making sure to keep some powder dry (cash) in order to take advantage of the soon to be calamity. And what was the analysis that gave rise to this prediction? It was based on the inevitability of a bear market to soon develop due to longevity of the current bull. Financial analysis not required. We’ve defied the cyclical gods and they simply won’t tolerate this hubris much longer.
Yet, I agree. All the bear predictors are correct. We will eventually have a bear market. For perspective, a really serious, big, full-on bear could see the indices get trimmed by maybe 20% - 25%. A more moderate bear would be in the range of 15% - 20%.
A crash like 2008 (apx 30%) requires a pervasive economic bubble to burst. That’s the only way to create that much financial damage. While the too-big-to-fail banks are even bigger than they were before the 2008 crash, and while some of their activities are worrisome, there is absolutely zero evidence of a pervasive bubble such as sub-prime lending coupled with securitization of the loans coupled with scandalous ratings agency activity. In retrospect (always 20/20) it’s pretty widely agreed that that’s what produced the 2008 debacle. That situation demanded a combination of activity by both political forces and financial institutions that don’t exist today. This is not a naive, head-in-the-sand proclamation. It’s simply the facts.
Yet, the bear will eventually roar. And all those gurus who have been forecasting the bear for years will be all over CNBC and FBN and wherever else they can find a soap-box to loudly proclaim how they warned us. They may not be quite so vocal about how long it took them to get it right, and the opportunity cost of having listened to them when they first issued their dire warnings. But truth be known, most of these guys don’t make living by investing, they get paid for analysis and advice. They seldom are held accountable for how often or how long they got it wrong.
But bear with me (get it?). So, let’s say the loss of faith finally comes to pass. What to do? If you still have a job, maybe it’s a good time to keep your head down. At the peak The Great Depression (1933) unemployment reached 25%. That’s pretty grim, but it also means that 75% of the folks that wanted a job still had one. I don’t know what you do for a living (you indicated that financial analysis is part of your work), but I’d venture that your job is pretty secure. You might take a salary hit, but that’s probably the worst. If you maintain enough cash to cover about 6 months living expenses and are reasonably free of consumer debt you can probably be worry free.
If you have been a follower of this board and have taken the majority of the advice found here to heart you will find yourself invested in solid companies. Of course, their stock price will take a hit, but the companies will be well equipped to not only weather the economic storm, but to exploit it. And because you avoided buying companies with stratospheric PEs, they will probably not get crushed nearly so badly as the companies that sold more promises than products.
As for keeping dry powder for investment, I personally keep very little capital out of the market. I don’t need to. Here’s why. As I just mentioned, most of the companies I’m invested in will exploit a bear market to buy out competitors worth buying. My investments carry far more dry powder than I could ever hope to accumulate. I will sit quietly on my investments as my portfolio value falls. I won’t sell except for the unlikely situation where I’ve badly misjudged and one of my companies get’s into serious trouble. My companies will take advantage of the downturn to a much greater extent than I could. After the bear goes back into hibernation, these companies will come back stronger than before.
The average bear market has an 18 month life span. Even at my age (I’m retired), 18 months is not an unendurable amount of time to just sit tight. If I have some extra cash (I don’t know where it would come from - so this is a hypothetical) I would most certainly look for a beaten down stock of a strong company and buy it.