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How To Build Back Your Portfolio In A Bear Market

·12 min read

Last month, the S&P ended their worst first half in more than 50 years, falling by nearly -21%, making it the worst first half performance since 1970.

That time was also a period of high inflation like we’re experiencing now.

Interestingly, the second half of that year saw the S&P up 27%.

Of course, that doesn’t mean that’s how it will go for the back half of 2022. But it doesn’t mean it won’t either.

Either way, with inflation running hot (41-year high), and the Fed behind the curve in trying to mitigate it, fears of a hard recession have grown.

In fact, when stocks were hitting their lows last month, it appeared the market was indeed pricing in a worst-case scenario (hard recession vs. a soft or shallow one). Or at least that’s what it looked like, until the market rallied off its lows, and has held ever since.

But what if the worst-case scenario doesn’t unfold?

In that case, the economy and stocks could soar. And the pullback we’ve seen could be presenting an enormous opportunity.

With the strongest labor market in decades (unemployment is near a 50-year low, with literally millions more jobs available than there are unemployed people to fill them), it’s hard to get to a worst-case scenario.

Moreover, the Fed is forecasting full-year GDP to come in at 1.7% this year, which means a strong second half rebound.

And St. Louis Fed President, James Bullard, in a recent interview, said he sees a “pretty good second half,” driven by “strong consumption this year.”

So, the Fed is looking for growth. A far cry from the worst-case scenario that the market has been pricing in.

Nonetheless, at the moment, we are in a bear market.

So now what?

Taking Stock Of The Current Bear Market 

The average bear market decline for the S&P (going back 100+ years), is -38%. With the S&P down by nearly -24% at its worst last month, we got more than 62% of the way there.

But it should be known that over the last 13 bear markets during that time, there’s been a fair share (5 of them) that were down ‘only’ in the mid-25ish percent range (-21.5% to -29.7%).

It should also be known that the faster a bear market begins, the shallower it tends to be.

Regardless, no bear market is fun while it’s happening.

But it’s worth noting (going back to the 1950’s), that the median returns for the market once a bear market has begun is nearly 3% one month later, more than 5% three months later, and more than 23% a year later.

And the rallies that follow after a bear market has ended are even bigger.

Now Is The Time To Start Building Your Dream Portfolio 

The pullback in the market has sent valuations down to their lowest levels in more than two years.

And that makes now a perfect time to start nibbling at your favorite stocks and their discount bargain prices.

Some may go lower. And some may not. But they are likely much lower now than where they were just a few months ago, or even years ago. And much closer to the bottom (if they haven’t already hit it).

That’s true for your favorite stocks, as well as plenty of new stocks that you probably haven’t even heard of yet.

This pullback will usher in lots of new and exciting opportunities in the inevitable bull market that follows.

It always does.

So, now is the time to start putting your list of dream stocks together. And staying engaged so you can discover what new stocks will lead the market when it goes back up.

The big gains that follow a bear market can be quite spectacular.

But since a large part of any bull market recovery typically comes at the very beginning, it’s imperative that you stay in the market.

The trick is to get into the right stocks.

There’s nothing wrong with raising cash by getting out of your laggards and poorest performers – stocks you know you should have gotten out of long before this pullback even happened. Or getting rid of those stocks that will have an uphill battle recovering even when this is over.

But then make sure to replace them with the strongest stocks that will be the new market leaders.

The point is, you want to be building your dream portfolio now, near the bottom.

With over 1,440 stocks down more than -50% YTD, and over 500 stocks down more than -70%, there’s tons of bargains out there, and an opportunity to pick up some great names at prices you could only have wished for a few short months, or even years ago.

But you need to be selective.

And it’s more important than ever to make sure you’re doing everything you can to get the most out of your trades. Because there will be distinct winners and losers as we move forward.

So, before you make your next trade, please read this first to learn how to put the probabilities of success in your favor.

Knowledge Is Power 

We’ve all heard the old adage; knowledge is power.

It’s a great saying because it’s true.

And that saying couldn’t be truer than when it comes to investing.

Take a look at your last big loser for example (which probably wasn’t too long ago). After analyzing what went wrong, you soon discover some piece of information that ‘had you known beforehand, you never would have gotten into it in the first place.’

I’m not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.

I’m talking about things that you could have known about or SHOULD have known about before you got in.

Did You Know?...

• Did you know that roughly half of a stock's price movement can be attributed to the group that it’s in?

• Did you also know that oftentimes a mediocre stock in a top performing group will outperform a ‘great’ stock in a poor performing group?

• And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1?

• And did you also know that the top 10% of industries outperformed the most?

More . . .


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Was your last loser in one of the top industries or in one of the bottom industries?

If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.

That’s what is meant by ‘knowledge is power’. Knowable things that you need to know.

That’s not to say that stocks in crummy industries won’t go up -- they do. And that’s not to say that stocks in good industries won’t go down -- because they do too.

But more stocks go up in the top industries, and more stocks go down in the bottom industries.

In times like this, you need to put the probabilities of success in your favor.

And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making any money?

Did You Know?...

• Did you know that stocks with ‘just’ double-digit growth rates typically outperform stocks with triple-digit growth rates?

• Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates? 

Did your last loser have a spectacular growth rate?

If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?

It seems logical to think that the companies with the highest growth rates would do the best. But it doesn’t always turn out to be the case.

One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.

For example, a company earning 1 cent a share that is now expected to earn 6 cents, has a 500% growth rate. But, if it receives a downward estimate revision to 5 cents, that’s a significant drop. Even though it still has a 400% growth rate, the estimates were just reduced by -16.7% and the price is likely to follow.

If you’ve ever wondered how a stock with a triple-digit growth rate could possibly go down -- that’s how.

Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint. And focusing on companies with growth rates above the median, but less than 50%, has produced some of the best results.

Did You Know?...

• Did you know that stocks receiving broker rating upgrades have historically outperformed those with no rating change by more than 1.5 times? And did you know they outperformed stocks receiving downgrades by more than 10 x as much? The next time one of your stocks is upgraded or downgraded, be sure to remember these statistics so you know how the odds stack up and whether they’re for you or against you.

• Did you know that stocks with a Price to Sales ratio of less than 1 have produced significantly superior results over companies with a Price to Sales ratio greater than 1? And did you know that those with a Price to Sales ratio of greater than 4 have typically shown to lose money? That doesn’t mean that all stocks with a P/S ratio of less than one will go up and those over four will go down, but you can greatly increase your odds of success by following these valuations.

• Did you know that the Zacks Rank is one of the best rating systems out there? And did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years, with an average annual return of 25% per year? That’s more than 2 x the returns of the S&P with an 82% annual win ratio. And when doing this year after year, that can add up to a lot more than just two times the returns.

• Did you know that two simple filters added to the Zacks Rank #1 stocks significantly increases its returns? What if you did? We have a screen that utilizes these two additional items to narrow that list down to 5 high probability stocks per week. Over the last 22 years (2000 thru 2021), using a 1-week rebalance, it’s produced an average annual return of 51.2%, which is 6.8 x the market. That screen is aptly called the Filtered Zacks Rank 5 screen. 

Do you know how well your stock picking strategies have performed?

Whether good or bad -- do you know why?

Do you know if your favorite item to look for is helping you or hurting you?

This is important stuff to know.

Beat The Market On Your Next Trade

After the recent sell-off, and with stocks trading at huge discounts, now is the time to build your watchlist with new stocks to get into that will lead the market.

And there's a simple way to add a big performance advantage for stock-picking success. It's called the Zacks Method for Trading: Home Study Course.

With this interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.

Zacks Method for Trading covers the investment ideas I just shared and so much more. It guides you to better trading step by step.

You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.

You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles..

The best of these strategies produced gains up to +48.2%, +67.6% and even +95.3% in 2021.¹

The course will also help you create and test your own stock-picking strategies.

Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market.

Please note: Copies of the book are limited and your opportunity to get one free ends midnight Saturday, July 16, unless we run out of books first. If you're interested, I encourage you to check this out now.

Find out more about Zacks Home Study Course >>

Thanks and good trading,


Zacks Executive VP Kevin Matras is responsible for all of our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.

¹ The results listed above are not (or may not be) representative of the performance of all strategies developed by Zacks Investment Research.

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