We are now officially in a new bull market, with the S&P 500 hitting new record highs last week. But there are some who are concerned that the most recent wave of bullishness still doesn't prove the market is in a good place. They point to indicators like the yield curve remaining inverted and projections that the nation's GDP growth will slow in the foreseeable future.
The bulls are officially in charge now, but it wouldn't be wrong for the average investor to keep some bear market trading plans handy, just in case. Timing the market is tough to do consistently well. Many of those who try it end up doing themselves more harm than good. But that doesn't mean you shouldn't be ready to act.
Let's look at where an investor might want to put a decent-sized chunk of their portfolio if a bear market makes a comeback. This isn't a call to go overboard specifically betting on bearishness. It's just reasonable advice for those who like to be prepared.
Focus on consumer staples like Coca-Cola or McDonald's
The premise is simple enough: There are some goods and services that fall out of demand when the economy weakens and money gets tight. Conversely, there are some products that benefit from economic malaise as consumers try to get the most bang for their limited bucks.
Fast food chain McDonald's (MCD -0.91%) offers up some evidence to support this idea. While the economy is reasonably strong right now, inflationary pressures have prompted plenty of people to dine more frequently at its eateries. As CFO Ian Borden explained of the company's third-quarter results, McDonald's is "benefiting from the trade down from more expensive alternatives within those kinds of income or segment levels," allowing the chain to "gain share with both the middle- and higher-income consumers."
Coca-Cola's (NYSE: KO) situation is similar, although not identical. Basic beverages are low-cost enough to continue spurring sales regardless of the economic environment, boosted by sheer loyalty to all the company's popular brand names.
Gold or other precious metals
You probably understand gold is an effective hedge against inflation, but it's also not a bad means of offsetting the impact of a bear market for stocks.
The key here is simply that gold is in a completely different kind of asset class. Stocks and bonds both have their unique attributes, and move differently than other kinds of assets. Indeed, they don't even move in tandem with one another.
Gold and its peers (like silver) are also untethered to other asset classes, allowing them to rise when others are losing ground. That doesn't inherently mean gold prices will rise when stocks are falling. But, it does mean they've got a good shot at doing so -- if only because other investors are more interested in non-stock opportunities.
There are several solid ways to step into such a holding, but the SPDR Gold Trust (GLD 0.32%) is the easiest and most accessible.
Must-have goods and services like pharmaceuticals and utilities
They're not considered consumer staples, but there are certain goods and services that remain in demand, regardless of the economic backdrop.
Consumers might cancel a vacation or postpone the purchase of a new car when they're worried about their foreseeable financial situation. They're unlikely to turn their power off, though. That's why electric utility companies such as Duke Energy (NYSE: DUK) and Southern Co. (NYSE: SO) hold up so well when the economy is weak.
Bolstering their resiliency is the fact that while they're not technically monopolies, effectively, they very often work like monopolies. Moreover, while their rates are regulated, most rate-hike requests are granted to the utility companies asking for them.
Prescription pharmaceuticals also generally continue being purchased during bear markets linked to economic malaise. Again, like food and electricity, medicine is often something that people simply won't -- and even can't -- live without. It certainly helps that health insurance companies are often footing the bill for the bulk of consumers' drug purchases.
Just be sure to hunt for proven, high-diversified pharmaceutical companies like Merck (NYSE: MRK). Younger biopharma players may run into liquidity headwinds when capital markets are struggling.
High-yield cash
Prior to the middle of 2022, interest rates had been so low for so long that some investors forgot yields on cash and cash equivalents hasn't always been comically low.
With rates back closer to long-term averages now, however, cash isn't exactly the inflation-lagging dead money it's been for the past several years. It wouldn't be crazy to park a piece of your portfolio in such an investment while waiting for a bear market to run its course. A small gain is still better than a big loss, after all.
This tip does come with something of a footnote: The yields on the simplest cash options are still markedly low; most are in the 0.5% range right now. True money market funds are paying in the ballpark of 5%.
How do you know which one you're holding? You'll likely have to check with your financial institution and look closely at your statements to be sure. However, unless you've specifically instructed your bank or broker to move cash into a money market fund, you're likely sitting on the lower-yielding option.
The only potential catch is liquidity. Whereas your bank or brokerage firm will freely issue checks or make immediate payments from your lower-yielding cash holdings, in most cases you'll need to explicitly instruct your service provider to sell any amount of money market funds you want to spend. Like the purchase of such a fund, such as sale takes a couple of days to complete.
Given their decidedly better yields, though, utilizing this option is well worth the trouble.
Or, use the dip to take on more exposure to the broad market
Last but not least, although the point of this exercise has been identifying where to invest in a bear market, don't look past the fact that bear markets are ultimately great opportunities to add more long-term exposure to the market as a whole. You can never really go wrong stepping into a broad-based fund like the SPDR S&P 500 ETF Trust (SPY 0.95%).
Not to discourage you from thinking -- and acting -- defensively when stocks start running into headwinds, but you should know that most market-timing efforts don't work. Indeed, as was already noted, they often do more harm than good. Data from Standard & Poor's indicates that over the course of the past year, more than 60% of large-cap mutual funds underperformed the S&P 500. Stretch that time frame out to 10 years, and the number of market laggards grows to nearly 86%. And these are professionals!
In other words, timing the market is tough. You're probably not going to be able to identify the beginning or the end of the bear market with enough accuracy to make it worth your while to try. You may be better served by trusting in the market's long-term track record and just adding exposure when stocks are down. Indeed, you may not want to jump into any of the aforementioned stocks or funds unless you're truly committed to owning them before or after a bear market as well.
