A Bear Market Checklist

The S&P 500 is only down about 10% from its all-time high. Yet it feels like the market is down a lot more than that.

Well, there’s a reason it feels that way. The S&P 500 – which is weighted by market cap – is being supported by a handful of expensive, high-flying tech stocks. But the average stock is already well into bear market territory.

Bespoke Investment Group ran the numbers and found that the average large cap stock is down 22.5%. For mid cap stocks and small cap stocks, it gets a lot worse. Mid caps are down 26.5% and small caps are actually down more than 30%. That’s not just a garden variety correction. That’s a deep bear market.

Looking at individual sectors, it doesn’t get any better. Across all market caps, there is not a single sector close to its 52-week high. Energy stocks are down a staggering 52%, followed by materials at 34%. The “least bad” sector – utilities – were down by 14%. Not quite bear market territory, but close enough.

So, it this it? Is the great bull market that started in 2009 officially over? Or is this just a much-needed pause before the next leg up?

We won’t know for sure until after the fact, but for now there appears to be no end in sight. 2015 was a rocky, trendless market, and 2016 has gotten off to a rocky start. But rather than wring our hands and cry about it, let’s sit down and make a bear market action list:

  1. When the market is rising you have less incentive to really look at your portfolio. But a bear market tends to make you snap to attention. Take some time today to review your portfolio. If you don’t recall why you bought a stock, it probably makes sense to sell it and move on.
  2. Rethink what it means to “invest.” If you’re not comfortable investing new money in the market right now, consider diverting those funds to paying down your mortgage or other debt. If you’re paying 4% on your mortgage, you effectively earn a 4% “return” on the debt you retire.
  3. Don’t neglect your 401(k) plan or IRA. The market might be nasty right now, but your 401(k) plan is more than just an investment account. It’s also a tax shelter. And your returns are effectively 100% on employer matching. So, even if you opt to hold the funds in cash, continue pumping as much money as you can into your 401(k) plan. When you’re ready to jump back into the market, you’ll have the cash on hand.
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