Spotting a Bear

At U.S. News and World Report, Simon Constable writes on how to spot a bear market:

If stocks are in a bear market, the last thing investors need is to hear about it after the fact. It’s as unhelpful as being told, “You should have been here yesterday.”

The pullback in the Standard & Poor’s 500 index hasn’t yet reached the classic definition of a bear market, which is a decline of 20 percent or more. But by that measure, the drop is nearly here.

Are we headed for a bear market, and what should investors do? The answers are tricky.

Watch the bond market. “They just don’t announce bear markets,” says Eddy Elfenbein, who writes the Crossing Wall Street financial blog. But there are methods of detection.

Elfenbein says it’s a harbinger of a bear market when interest rates on two-year government securities are higher than those on 10-year Treasuries. That differential in interest rates encourages investors to pull their money from long-term investments, such as 10-year Treasuries and stocks, and instead earn better yields for a short-term investment in the two-year bonds.

“We are nowhere near that now,” he says. Two-year treasuries yield around 0.74 percent, versus 10-year notes that yield 1.87 percent. Longer-term investments, like stocks, still make sense.

While he doesn’t see a bear market now, Elfenbein says he likes to keep a famous and sobering investing quote from ace stock picker Peter Lynch in mind: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Posted by on February 9th, 2016 at 11:17 am


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