To state the obvious, stock indices around the world are in bear markets and clear downtrends. Nor are other asset classes, like fixed income, providing relief. Indeed, longer-dated U.S. treasuries are actually performing worse this year than U.S. stocks in the weakest year for bonds since 1949.
What to do about this? What are some treatments for the bear market blues?
Before I discuss the best way I know of to manage bear markets, I need to make a broad point about bull markets and bear markets. As a general rule, bull markets are for growing capital, and bear markets are for protecting it. As a result, expecting to grow capital during a bear market is often futile and can easily end in tears. The best that most investors can do in bear markets is to limit losses and drawdowns to prepare to compound capital better in the next bull market.
Readers of this blog and clients of Stillpoint know the obvious answer to treating the bear market blues—momentum. Momentum approaches applied to differing asset classes have a centuries-long track record of limiting the downside and capturing much of the upside in security and commodity prices. These approaches provide better risk/reward profiles than does simply buying and holding the market for stocks and bonds.
So far this year, the momentum approaches that Stillpoint deploys have seen portfolios decline substantially less than that of buy-and-hold portfolios. The generic buy-and-hold portfolio that I follow is down more than 20% YTD as of this writing. The portfolio consists of the following ETFs: VTI (30%), for U.S. stocks; EFA (30%), for foreign stocks; and IEF (40%), for fixed-income. Here is how the elements of that portfolio have performed thus far in 2022:
Total return performance data on a buy-and-hold portfolio consisting of 60% stocks and 40% bonds for 2022 YTD as of September 25, 2022. Past performance is no guarantee of future results.
If you check the performance of numerous other buy-and-hold portfolios, you’ll find that many are performing much worse than this, and few are performing better. All are down at least 13% YTD.
Momentum’s relative outperformance in 2022 is also notable because there have been few alternative asset classes in sustained uptrends in 2022. As I mentioned, stocks and bonds are both in downtrends, but gold is also down in 2022, as is real estate. While commodities provided strong uptrends in the first half of 2022, they have since corrected and provided no edge.
Total return performance data of selected ETFs for gold, real estate, and commodities for 2022 YTD as of September 25, 2022. Past performance is no guarantee of future results.
What has worked better than these common alternatives is yet more exotic, specifically short-dated floating-rate U.S. treasuries and actively managed commodity futures instruments.
This is how Stillpoint has outperformed: by standing aside for most of the big market declines in stocks and bonds and placing capital where it is treated better.
Not surprisingly, 2022 has been the year for many buy-and-hold investors to consider momentum approaches, either solely or to diversify against the weaknesses in the buy-and-hold approach. In this way, Stillpoint welcomes the opportunity to discuss how prospective clients can improve their portfolios’ risk/reward profiles.