Since January, I’ve warned you we’d enter a “cyclical” bear market this year.
We’ve officially begun crossing into that territory.
A bear market is when the market drops 20% or more from a recent high.
So far this year, the S&P 500, Nasdaq, and DOW are down 15%, 25%, and 11% from their recent peaks in January 2022.
Even an inflation hedge like gold is down 10% from its March 8 high.
This confirms my February prediction that a broader “cyclical” bear market was on the horizon.
A cyclical bear market is a market sell-off during a long-term or “secular” bull market.
The 1987 stock market crash was a cyclical bear market within a secular bull market. That bull market started in 1982 and ended in 2000.
Secular bull markets generally last 12–20 years.
My research suggests the current secular bull market (which began in 2009) should run until 2028.
Like you, my portfolio is mostly a sea of red right now. But I’m not sweating this drop because I know we’re in a secular bull market.
So long as I don’t sell into the weakness, the long-term (secular) bull trend will reassert itself and take the markets to new highs.
While I believe we’ll experience a cyclical bear market in 2022… I expect the markets will close the year flat.
That’s the good news.
The bad news is we’ve still got room to fall…
More Pain Ahead
Stocks, bonds, precious metals – and even crypto – are all headed lower. The major indexes could drop another 8–15%. And the entire crypto market could drop another 20–25%.
In my opinion, it’s a mistake to sell everything and try to “trade” around the volatility.
The big returns come from holding world-class assets over time. I’m not a trader, and most likely, neither are you.
You might think you are, but you’re probably not. You’ll be skinned alive by the real traders that prey on the non-professionals.
Just ask the countless retail investors who thought they were being smart by dumping stocks in March 2020 only to watch the market rise 39% over the following three months.
This is the same recommendation I made to you in March 2020. I advised doing nothing except holding on to what you had. And using the weakness to buy more word-class assets if it made financial sense for you to do so.
The market would go on to drop more than 30%. I can assure you I wasn’t winning any popularity awards when that happened.
But I’m not here to be right for a day or a week. I’m here to help you transform your financial life forever.
And for those that listened to me in March 2020… not only did they recoup all of their paper losses – they also got to ride the market up for as much as a 107% gain.
Now that you’re armed with this information, the next step is to find opportunity in the carnage.
The best strategy is to buy world-class companies with a track record of surviving economic and stock market declines.
If you get them at the right price… they’ll set you up for solid gains as we exit this cyclical bear market and resume the secular bull market.
Before we get to that, let me tell you why I believe the market is headed lower in the short term…
What’s Going On in the Market
Right now, we’re seeing a “perfect storm” of fear and uncertainty loom over the markets…
The Federal Reserve is raising rates, and inflation is running hot at 8.5% – the highest since 1981. Meanwhile, continued supply chain disruptions and the war in Ukraine are impacting everything from energy to food costs.
Those negatives are already priced into the market… So it’s no surprise that the broad market is down double digits.
What is hitting us now are margin calls.
You may already know that much of Wall Street uses massive amounts of leverage to generate its returns.
The primary asset it uses to secure its borrowing is U.S. Treasury notes.
Normally, that wouldn’t be a problem. Treasury prices are usually very stable. But not this year. Bonds are on track for their worst year ever.
Bond prices are down 10%. That might not sound like a lot… But for an asset that’s supposed to have low volatility, a 10% drop is like a 1987 crash for the bond market.
Here’s why that matters…
Some firms will lend 10x the value of your Treasury portfolio. So if you have $100 million in bonds, they’ll let you buy $1 billion in stocks.
But if the bonds drop 10% from $100 million to $90 million… that means you can only borrow $900 million ($90 million x 10).
In this example, you’d either have to post $10 million more in collateral or sell $100 million worth of stock to meet your margin call.
These margin calls beget more margin calls as they drive the price of stocks and bonds lower.
Margin-led sell-offs were how you could buy great American companies like American Express for $10, JPMorgan for $15, and Bank of America for $2.50 during the Great Financial Crisis.
Today, they trade at $160, $120, and $36, respectively.
I don’t expect bargains like that to present themselves this time. But I do expect we’ll see some screaming deals put in front of us.
I know it doesn’t feel like it … but this sell-off is a gift.
If you’re patient, you can use these sell-offs as an opportunity to get world-class assets on the cheap.
It can take weeks or months for the process to unwind. So here’s when you should be ready to go shopping…
The Right Time to Go Shopping
Like I mentioned earlier, this is going to be a difficult year. Investors are deathly afraid the Fed will get out of control with raising interest rates.
If you want to get exposure to tech, I’d wait for the Nasdaq to drop to its 200-week moving average (MA). That’s around the 11,000 mark.
That’d be a good sign to go long on the Invesco QQQ Trust (QQQ). It holds some of the top tech companies in the world, including Amazon, Apple, Google, and Microsoft.
And hold off until the S&P 500 hits its 200-week MA if you’re looking for blue-chips on the cheap… That’s around 3,500.
That’d be my signal to buy the SPDR S&P 500 ETF (SPY), which tracks the entire index.
Aside from that, you’ll also come across amazing blue-chip companies trading as if their earnings are about to get cut in half.
These companies pay yields over 4%. They have records of ever-increasing dividends.
They sell products people want or need. And they have been selling these products for decades.
These businesses will continue to churn out rivers of cash no matter what happens.
They’ll continue to pay out that cash in the form of ever-increasing dividends. And for the first time since 2020, their valuations are becoming compelling.
Friends, just because a company’s stock price is going down… it doesn’t mean it’s going out of business or that you should sell. That’s a mistake a lot of investors make.
Many stocks are getting punished for reasons unrelated to their businesses. So be patient and let the price come to you.
Make this volatility your servant by using it to buy world-class assets on the cheap.
Hold your long-term investments. Ride it out. A year from now, you’ll be glad you did.
Let the Game Come to You!