A recent rise in the S&P 500 index has some investors wondering if the bear market is in the rearview mirror. But bear market rallies aren't uncommon and can be substantial. The widely followed index has jumped more than 10% since its October 2022 lows, just over one month ago.
Now is a good opportunity to step back and think about how beneficial a recovery from a bear market can be to one's portfolio. It is also a great time to evaluate what to invest in next.
If you have $10,000 to invest for the long term, here is a strategy to consider putting to work now.
Nvidia's rapid move higher
While market index recoveries can be surprisingly sharp and fast, those of some index components can be even more drastic. One recent example is the 42% move in Nvidia (NVDA -10.01%) shares in the six weeks beginning Oct. 11. The stock dropped to that October low after investors began to fret about the direction of the business. Nvidia's gaming and crypto businesses are in decline, and growth in its other segments aren't yet making up for that.
But many of its customers in the artificial intelligence (AI), autonomous driving, and data center businesses are in early stages of growth. More than 90% of Nvidia's fiscal third-quarter 2023 revenue still came just from gaming and data center business, however. Those segments are going in different directions, and investors have feared the drop in the gaming chip market. But data centers continue to be a growth market, with that segment now overtaking gaming as Nvidia's major market.
Data source: Nvidia. Chart by author.
Growth in data centers, as well as future growing contributions from automotive and AI customers who have increasing needs in autonomy, robotics, and data analysis, are what investors in Nvidia are betting on now. Even with the stock's rapid rise recently, Nvidia shares are still down 45% year to date. While it may be too much of a risk to put the full $10,000 into the stock today, it would make sense to take a position with one-third of those funds.
Target will help you grab some income too
Another stock that has been hit hard this year is Target (TGT 1.03%). While Target shares also rebounded during the recent market rally, they gave back most of those gains after the retailer reported its third-quarter results. The company has been discounting excess inventory after it over-ordered some products as it tried to navigate supply chain disruptions. The promotional activity has continued to hit Target's margins, and investors have punished the stock as a result.
Management now estimates its fourth-quarter operating margin rate to be about 3%, which is half what it projected in the last quarterly report. But the inventory situation will get resolved in time. Target shares have dropped to the lowest level in two years, and as a result, its dividend yields almost 2.5% at the recent share price. That's the highest since the market plunged at the onset of the COVID-19 pandemic in early 2020.
Investors should feel secure in continuing to receive that dividend income, too. Target has raised its dividend for 51 consecutive years, including a 20% boost in June. By investing another third of an available $10,000 in Target right now, one can buy shares in the successful retailer while the stock is down, and also receive ongoing income that can be reinvested later.
Keep some powder dry
That's the beauty of a bear market. Not only can investors get the chance for capital appreciation when stock prices recover, they can also add a stream of higher future income. Of course, not every stock will recover to previous highs, but Nvidia and Target both have successful businesses with bright futures.
Whether the recent market rally means this bear market has come to an end or not remains to be seen. But allocating one's investment capital into two different businesses, including one that pays a reliable, growing dividend, helps reduce the risk. And holding a final portion of that capital for future use gives an investor the chance to take advantage of another market drop if the recent move higher is just a bear market bounce. But putting some money to work now in Nvidia and Target will likely look like a good decision when looking back on this bear market years from now.
