Why a Bear Market Is an Investor’s Best Friend

In the USA, both the S&P 500 and the Nasdaq are in bear market territory. A bear market is often taken to mean a 20% fall. That’s either from a recent peak, or over a set period of time.But generally, investors tend to think of any sustained upwards run as a bull market. And any significant downwards spell is a bear market. Typically, the average bull market has lasted around five years. The average bear, meanwhile, continues for a little more than a year.

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Might long-term investors be better of if that was the other way round, with more falls than rises? Wouldn’t we have more opportunities to buy cheap shares? To answer that, I can’t think of anything better than looking at how the billionaire boss of Berkshire Hathaway, Warren Buffett, deals with stock market falls.

In the few weeks after the Covid-19 pandemic struck, the S&P 500 fell 30%. The recovery was surprisingly fast, with the index regaining its ground by August. The FTSE 100 took quite a bit longer, mind. What happened the next year, in 2021? The S&P 500 gained 28.7%, while Buffett’s Berkshire Hathaway slightly bettered it with 29.6%. Buying shares while they were depressed by the pandemic was clearly a good plan.

Major bear market
But that’s nothing compared to the carnage resulting from the the financial crash, which kicked off in 2007. Between a high point in October that year, and the beginning of March 2009, the S&P 500 crashed by a whopping 56%.

Berkshire Hathaway suffered too, albeit with a softer fall of 32%. Now what do we see if we wind forward a decade? From the depths of the banking crash in 2009, the S&P 500 had gained 280% by the same point in 2019. Buffett’s shareholders did a bit better on 290%, and they’d started from a significantly lower initial fall.

Just like the Covid market slump, the financial crash provided investors with a great time to buy. And those who were panicking and selling while shares were down? Well, we can see what they missed.

Fear and greed

Buffett is famed for buying heavily when he sees great companies unfairly marked down. In his 1986 letter to Berkshire Hathaway shareholders, he explained how he avoids trying to time the market bottoms. Instead, he said: “Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

That approach to bear markets has served Buffett, and his shareholders, well.From Buffett taking control of Berkshire Hathaway in 1965 up to the end of 2021, the S&P 500 managed a total return (including dividends) of more than 30,000%. Berkshire, meanwhile, soared by a total of 3.6 million percent!

We’re not all going to be as good as Buffett. But even investors who make regular purchases in an index tracker will benefit from bear markets over the long term. The simple truth is that when markets are down, we can buy more shares for the same money.

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by Alan Oscroft

Source: Why a bear market is an investor’s best friend – The Motley Fool UK

Critics by: principal.com

If you have reviewed these basics and you still have money at the end of the month, here’s a quick look at further investment options to consider.

1. Increase your deferral to your 401(k) or other workplace retirement plan.

The maximum amount you can contribute each year through elective salary deferrals is $19,500.1 And if you’re 50 or older, you can also make a “catch up” contribution of up to $6,500.2

“Bumping up your deferral, even by 1 or 2%, may not seem like much. But with the power of compounding earnings, it can make a big difference over 20 or 30 years,” says Heather Winston, CFP®, assistant director of financial advice and planning for Principal®. Also, weigh the difference between saving in a tax-deferred account vs. a taxable one.

Winston says if your account has taken a dip, increasing your contributions may help you reach your retirement goal sooner. If the markets have dropped, the money you defer to your retirement plan may go further by allowing you to buy more shares.

To get started: If you have a retirement account from your employer with services by Principal, you can log in to increase your contribution. First time logging in? Here’s how you create an account.

2. Add to your traditional or Roth Individual Retirement Account (IRA).

Good news: You have until July 15, 2020, to make a 2019 contribution to an IRA, thanks to recent legislation. (And you can always make a 2020 contribution now, too.)

The maximum annual contribution to a traditional IRA is $6,000. If you’re 50 or older, the IRA catch-up contribution limit is $1,000. (Read the basics of IRAs.)

Depending how much money you make and if you’re not covered by a retirement plan at work, you may be able to deduct all or a portion of your traditional IRA contributions from your taxes (details are on the IRS website). The more you save today, the more you’ll likely have years down the road.

With a Roth IRA, you can contribute up to $6,000 per year using after-tax money. If you’re 50 or older, you can add an extra $1,000 per year. To contribute the full amount to a Roth IRA, you need to make less than:

  • $124,000 if you’re single or file as head of household.
  • $196,000 if you’re married filing jointly.

You can withdraw your annual Roth IRA contributions without taxes or penalties at any time. If you have earnings, you can withdraw them tax-free in retirement.3

To get started: Review our IRA solutions to see what may be best for you.

Tip: Monitor and rebalance. If you’re investing in the market through a retirement plan, IRA, stocks, or mutual funds, consider putting this on your to-do list annually: Rebalance your portfolio (PDF) and make sure you have a diverse mix of investment options within various asset classes. A financial professional can help you learn how to do that.

3. Open a brokerage account, if you don’t already have one.

If you’ve never invested in stocks and mutual funds outside of your workplace retirement plan or IRAs, you could start by opening a brokerage account. (Not sure if you’re ready? Read “Four signs you’re ready to start investing.”)

You’ll need to know your risk tolerance. A risk profile (PDF) places you on a scale somewhere between conservative (more averse to risk) and aggressive (more tolerant of risk). Your profile can help you select investments and build a portfolio at a level of risk you’re comfortable with, while continuing to work toward your goals.

This year is a good test of investors’ tolerance for risk. If you find yourself worrying about whether your portfolio is gaining or losing day-to-day, or certainly if you’re losing sleep, you may need to adjust your risk profile. When your risk tolerance matches your investment portfolio, volatile times can be less concerning for you.

To get started: Connect with a financial professional to discuss your options.

Asset classes you might consider

If you invest, consider diversifying—spreading your money across multiple types of investments—to help reduce the risk of losing money.

  • Large companies and technology stocks will likely continue to perform well.
  • Look at small companies and sectors like energy, materials, consumer discretionary (non-essential goods and services), and financials to improve.
  • Stocks in emerging countries may perform better than those in developed countries outside the United States.
  • For bonds, go for higher yields on high quality corporate and municipal bonds at short-intermediate maturities.
4. Set aside money in a 529 savings plan for a child or grandchild.

A 529 savings plan allows you to invest your money to be used for qualified education expenses such as college, apprenticeship programs, and K-12. This includes tuition, room and board, mandatory fees, and textbooks. You designate how and where it’s spent.

Before opening an account, get a full understanding of the plan, including its tax benefits, fees, expenses, and investment options. You can open a 529 plan offered by any state, so shop around for the one that best suits your needs.

To get started: If you’re interested in learning about our 529 plan, visit scholarsedge529.com.

5. Contribute more to a Health Savings Account (HSA).

If you’re enrolled in a High Deductible Health Plan (HDHP), you can add a total of $3,550 a year for single coverage or a max of $7,100 for family coverage in 2020. If you’re over age 55 but under 65, you can also make “catch-up” contributions to your HSA, to the tune of $1,000 more per year.

An HSA offers a triple advantage on federal income taxes: Money put in isn’t taxed, it grows tax-free, and you’re not taxed when you take money out for medical expenses. Plus you decide how the funds are invested, and how you’ll use the money for health care expenses.

To get started: Talk to your employer’s human resources department about how to contribute more to an HSA associated with your HDHP.

Stock Market Could Crash Another 20% If U.S. Plunges Into Recession

As a growing number of investment banks and company chiefs warn that the likelihood of a recession is increasing, analysts at Morgan Stanley are telling clients that the stock market—despite reeling from a steep selloff in recent weeks—has plenty of room to fall before hitting levels consistent with recession-era lows, which would be especially bad for cyclical industries like travel and hospitality.

Despite major stock indexes plunging more than 20% below recent highs, markets are still only down by about 60% of the average drawdown compared with previous recessions (which denote two consecutive quarters of negative GDP growth), Morgan Stanley analysts told clients in a Tuesday note.

As the Federal Reserve works to combat decades-high inflation with interest rate hikes that will likely stunt economic growth, a recession “is no longer just a tail risk,” analysts led by Michael Wilson wrote, putting the odds of one over the next year at 35%, up from 20% in March.

They estimate the S&P 500 could plunge as much as 20% to 3,000 points, from current levels of 3,770, if the U.S. falls into recession, citing earnings that tend to fall an average of 14% during recessions—a marked turnaround from record profits and 25% growth last year.

“The bear market will not be over until recession arrives—or the risk of one is extinguished,” the analysts said, adding that market weakness will likely continue over the next three to six months in the face of “very stubborn” inflation readings.

With high prices deterring some consumer spending, Morgan Stanley says stocks tied to discretionary spending, like those in retail, hotels, restaurants and clothing, are at higher risk of a downturn, while those tied to the internet, payments and durable household goods (like appliances and computers) are less at risk.

The note comes the same day Tesla CEO Elon Musk said the U.S. economy will “more likely than not” face a recession in the near term, echoing concerns raised by several other top business leaders and financial institutions following last week’s steeper-than-expected hike in key interest rates, which tend to deter spending by making borrowing more expensive.

Morgan Stanley’s not alone in raising recession odds this week. In a note to clients Monday, Goldman Sachs’ chief economist, Jan Hatzius, said the firm now sees “recession risk as higher and more front-loaded,” given the Fed’s more aggressive rate hike, putting the odds of a recession over the next two years at 48%, up from 35% previously. The investment bank estimates tighter financial conditions could drag down GDP as much as 2 percentage points over the next year.

Restaurants are most at risk of a pullback in spending, according to a Morgan Stanley survey of some 2,000 consumers. Roughly 75% of respondents said they’ll cut back on dining out over the next six months, while 60% said they’d do so on deliveries and takeout from restaurants. Though driving much of the inflationary gains, essential items like gas and groceries should see more resilient spending, with roughly 40% of consumers saying they’d cut back on either.

Major stock indexes plunged into bear market territory last week ahead of the Fed’s largest interest rate hike in 28 years, and the gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies. “We don’t believe the Fed can stop the issues that are causing inflation on the supply side without absolutely wrecking the economy, but at this point, it looks like they are resigned to the fact that it must be done,” says Brett Ewing, chief market strategist of First Franklin Financial Services. Goldman Sachs has warned clients it expects another 75-basis-point hike in July.

I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill

Source: Stock Market Could Crash Another 20% If U.S. Plunges Into Recession—These Industries Are Most At Risk

The best hope for stocks right now is a recession that crushes inflation and allows the Fed to slow, stop or even reverse rate hikes.

Why it matters: Down 20.5% so far in 2022, it’s the ugliest year for the S&P since 1962. The drop vaporized $9 trillion in paper wealth, delivering a psychological shock to millions whose retirement is mostly in stocks.

Driving the news: Facing persistent inflation, the Fed delivered its largest rate hike since 1994 on Wednesday.

  • The increase is the monetary-policy equivalent of stomping on the country’s economic brakes — sharply increasing the risk that growth contracts.
  • Despite the recent beating shares have taken, the Fed’s announcement was greeted with open arms by investors. The S&P 500 rose 1.5%. The Nasdaq rose 2.5%. Interestingly, the Russell 2000 — which is more closely tied to short-term ups and downs of the economy — rose less, at just 1.4%.

The big picture: A huge rate hike that raises the risk of recession may sound like a bad thing for stocks — but with inflation still rising, it isn’t.

  • Essentially, investors are saying they prefer a big, sharp Fed-induced economic shock now if it quickly gets inflation under control. In theory, that could allow lower rates to return after inflation is vanquished.
  • Low interest rates have been crucial to the performance of stocks over the last decade.

Context: While Americans have a habit of looking at the stock market as an economic indicator, the linkage between economic growth and stock market performance is surprisingly weak, and, some academics say, nonexistent. The most extreme example of this reality arose during the bleakest moments of the COVID-related recession.

  • In April 2020, the U.S. economy was essentially on life support. Unemployment that month was 14.7%. There were, quite literally, bread lines miles long.
  • That month the S&P 500 posted its best month in 33 years, rising nearly 13%.

What gives? Well, in late March 2020, the Federal Reserve had to cut interest rates to zero and restart money-printing programs do deal with the COVID crisis. (The Federal government also began dumping what would ultimately be trillions of dollars into the economy to keep people afloat.)

The intrigue: But don’t recessions hurt corporate earnings? Wouldn’t that make stocks fall?

  • Earnings are one ingredient in stock prices, and they can definitely fall during recessions. But recently, interest rates — essentially the yield on the 10-year Treasury note — have played a more important role in establishing stock prices than earnings.
  • That’s because those interest rates largely determine the valuation multiple — otherwise known as a price-to-earnings ratio — investors use to determine the price they’re willing to pay for those future earnings (effectively, the price of a stock).
  • TL;DR: Higher rates = lower valuations, and vice versa.
  • So, even if earnings are expected to fall, stock prices can still rise, if valuations rise enough. Those valuations are largely determined by interest rates — and those rates are largely determined by Fed decisions.

The Federal Reserve made an aggressive new move in its campaign to bring down inflation Wednesday, raising its target interest rate by three-quarters of a percentage point, the steepest rate hike since 1994 — and indicated another similar move could be coming next month.

Driving the news: In addition to increasing their target for short-term interest rates to a range of between 1.5% and 1.75% Fed officials projected that their target rate will reach 3.4% late this year, far higher than the 1.9% they envisioned in March. Mortgages, car loans and credit card debt are all about to get more expensive.

Yields on U.S. government bonds — known as Treasuries — rocketed in recent days, as Friday’s inflation report convinced many that a combination of persistently high inflation and aggressive Federal Reserve interest hikes, is on the way. The yield on the 10-year Treasury note surged to nearly 3.50% in recent days, a level not seen since 2011……

  Matt Phillips

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Omicron Job Loss? Unemployment Claims Unexpectedly Spike One Week After Steep Drop In Jobless Benefits Numbers

The number of new unemployment claims unexpectedly jumped for the second week in a row this month, despite a steep drop in the overall number of Americans receiving unemployment benefits just one week earlier—a concerning sign for the labor market recovery after experts warned a record surge in coronavirus cases—spurred by the rapidly spreading omicron variant—could slow the economic recovery.

About 230,000 people filed initial jobless claims in the week ending January 8, an increase of 23,000 from the previous week, according to the weekly data released Thursday. Economists were only expecting about 200,000 new claims last week, according to Bloomberg data.

“This may well be the first report suggesting Omicron is leading to new job loss,” Bankrate senior economic analyst Mark Hamrick wrote in a Thursday note, pointing out the largest increases were reported in California and New York, where new claims totaled more than 20,000 combined.

The new report also showed the number of Americans receiving unemployment benefits fell to less than 1.6 million in the week ending January 1, a decrease of 194,000 from the previous week and the lowest level since June 1973.

“The future path of the pandemic remains highly uncertain, but the underlying job market narrative overall continues be one of scarcity of available applicants and workers,” Hamrick said. “The latest wrinkle, the high level of individuals testing positive, becoming ill or staying away from work, has added to supply chain disruptions with inflation already running red-hot.”The new unemployment data comes after a disappointing labor report on Friday showed the U.S. added a lower-than-expected 199,000 jobs in December.

After the report, Hamrick said it was still “difficult to measure” the economic impact of the omicron variant at that point and cautioned against dismissing its potential, pointing out widespread worker shortages, stoked in part by lingering concerns over the pandemic, remain a big uncertainty.

Economists surveyed by Bankrate said the variant could weigh on job growth in the first three months of the year, but estimated the unemployment rate will fall from 3.9% to 3.8% in a year. Moody’s Analytics’ Mark Zandi shared a similar word of caution, saying, “Risks are rising,” and forecasting that the economic recovery “is set to turn soft” as omicron stunts business. Amid the latest surge, credit card spending and restaurant bookings have already dropped substantially, while widespread flight cancellations have been another economic concern, Zandi notes.

According to the Labor Department, the U.S. has thus far recovered about 80% of the 20.5 million jobs U.S. employers cut between March and April of last year.

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I’m a senior reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I

Source: Omicron Job Loss? Unemployment Claims Unexpectedly Spike One Week After Steep Drop In Jobless Benefits Numbers

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Global Merger & Aquisition Volumes Hit Record High In 2021, Breach $5 Trillion For First Time

Global dealmaking is set to maintain its scorching pace next year, after a historic year for merger and acquisition (M&A) activity that was fueled largely by easy availability of cheap financing and booming stock markets.

Global M&A volumes topped $5 trillion for the first time ever, comfortably eclipsing the previous record of $4.55 trillion set in 2007, Dealogic data showed. The overall value of M&A stood at $5.8 trillion in 2021, up 64% from a year earlier, according to Refinitiv.

Flush with cash and encouraged by soaring stock market valuations, large buyout funds, corporates and financiers struck 62,193 deals in 2021, up 24% from the year-earlier period, as all-time records tumbled during each month of the year.

Investment bankers said they are expecting the dealmaking frenzy to continue well into next year, despite looming interest rate hikes.Higher interest rates increase borrowing costs, which may slow down M&A activity. However, deal advisers still expect a flurry of large mergers in 2022.

Accommodative monetary policies from the U.S. Federal Reserve fueled a stock market rally and gave company executives access to cheap financing, which in turn emboldened them to go after large targets.

The United States led the way for M&A, accounting for nearly half of global volumes – the value of M&A nearly doubled to $2.5 trillion in 2021, despite a tougher antitrust environment under the Biden administration.

The largest deals of the year included AT&T Inc’s (T.N) $43 billion deal to merge its media businesses with Discovery Inc (DISCA.O); the $34 billion leveraged buyout of Medline Industries Inc; Canadian Pacific Railway’s (CP.TO) $31 billion takeover of Kansas City Southern (KSU.N) ; and the breakups of American corporate behemoths General Electric Co and Johnson & Johnson (JNJ.N) .

According to a survey of dealmakers and advisers by Grant Thornton LLP, over two-thirds of participants believe deal volumes will grow despite challenges posed by regulations and the pandemic.

Deals in sector such as technology, financials, industrials, and energy and power accounted for the bulk of M&A volumes. Buyouts backed by private-equity firms more than doubled this year to cross the $1 trillion mark for the first time ever, according to Refinitiv data.

Despite a slowdown in activity in the second half, dealmaking involving special purpose acquisition companies further boosted M&A volumes in 2021. SPAC deals accounted for about 10% of the global M&A volumes and added several billions of dollars to the overall tally.

Analysts say the U.S. economy has proven resilient in the face of pandemic-related challenges, and many expect the global economy will still expand at a well-above-trend pace.

After initially tumbling in December, world stocks recovered over the holiday period as investors became reassured economies could handle the surge in Omicron coronavirus cases, and are heading back toward record highs.

“As far as COVID is concerned, for now, market participants may stay willing to add to their risk exposures, and perhaps push equity indices to new highs, as several nations around the globe held off from imposing fresh lockdowns, despite record infections around the globe the last few days,” said Charalambos Pissouros, head of research at Cyprus-based brokerage JFD Group.

The dollar index fell 0.418% on Friday. On Wall Street, New Year’s Eve trading ended near record highs on Friday. read more

All three major U.S. stock indexes scored monthly, quarterly and annual gains, notching their biggest three-year advance since 1999.

Reuters GraphicsInvestors have held onto expectations for resilience in the global recovery into 2022 and the prospect of further gains if money remains cheap and corporate profitability high.

This year’s “everything rally” has seen a wall of cheap central bank cash, government stimulus and strong economic rebounds out of the pandemic make it hard not to profit from soaring asset prices.

U.S. stocks have powered the global rally as record-breaking earnings figures from Big Tech companies excited investors. This week the S&P 500 hit another record high.

By

Source: Global M&A volumes hit record high in 2021, breach $5 trillion for first time | Reuters

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Get to know everything about what Post-Merger Integration (PMI) means, 4 Steps to PMI Success and possible challenges of PMI.

Post-merger integration is the process of unifying two entities and their assets, people, tasks, and resources in a manner that creates the most value for the future of the enterprise by realizing efficiencies and synergies.

From an IT perspective, PMI is a complex process requiring the leadership of enterprise architects to ensure a smooth process. According to the 2021 LeanIX M&A Report, nearly 90% of EAs are involved in post-merger integration, with the following use cases named as most prevalent.

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Oil Prices Slip After China Cuts Import Quotas

Oil prices eased on Thursday after the world’s top importer China cut the first batch of crude import allocations for 2022, offsetting the impact of U.S. data showing fuel demand had held up despite soaring Omicron coronavirus infections.

Brent crude futures fell 27 cents, or 0.3%, to $78.96 a barrel at 1322 GMT. U.S. West Texas Intermediate (WTI) crude futures slid 36 cents, or 0.5%, to $76.20 a barrel after six straight sessions of gains. Oil prices pared earlier gains after China, the world’s top crude importer, lowered the first batch of 2022 import quotas to mostly independent refiners by 11%.

“Market sentiment weakened on worries that the Chinese government could take stricter actions against the teapots,” a Singapore-based analyst said, referring to the independent refiners.

Global oil prices have rebounded by between 50% and 60% in 2021 as fuel demand roared back to near pre-pandemic levels and deep production cuts by the Organization of the Petroleum Exporting Countries and its allies (OPEC+) for most of the year erased a supply glut. read more

U.S. Energy Information Administration data on Wednesday showed crude oil inventories fell by 3.6 million barrels in the week to Dec. 24, which was more than analysts polled by Reuters had expected. Gasoline and distillate inventories also fell, versus analysts’ forecasts for builds, indicating demand remained strong despite record COVID-19 cases in the United States.

Oil prices also drew support from steps taken by governments to limit the impact of record high COVID-19 cases on economic growth, such as easing testing rules. read more

OPEC+ will meet on Jan. 4 to decide whether to continue increasing output in February. Saudi Arabia’s King Salman said on Wednesday the OPEC+ production agreement was needed for oil market stability and that producers must comply with the pact. read more

Iraq said it would support sticking to existing OPEC+ policies to raise output by a combined 400,000 bpd in February. Shell said it had resumed exports of Forcados oil in Nigeria, easing one of three major global outages which also include Ecuador and Libya. read more

Crude futures slipped on Monday as concerns over slowing global growth outweighed the prospect of tightening supply after talks among key producers to raise output in coming months stalled.

Brent crude for September fell 0.52% to settle at $75.16 per barrel while U.S. West Texas Intermediate crude for August settled at $74.10 a barrel, for a loss of 0.62%.

Both benchmarks fell around 1% last week but still hover near highs last reached in October 2018.

The spread of coronavirus variants and unequal access to vaccines threaten the global economic recovery, finance chiefs of the G20 large economies warned on Saturday.

A Reuters tally of new COVID-19 infections shows them rising in 69 countries, with the daily rate pointing upwards since late-June and now hitting 478,000.

“The market has been a bit negative as of late amid the growing sense that the latest OPEC+ impasse could be a precursor to a pump-and-grab scenario, meaning a lot more oil potentially gets put on the market,” said Stephen Brennock of oil broker PVM.

Oil prices slumped last Tuesday after the Organization of the Petroleum Exporting Countries and their allies, a group known as OPEC+, did not reach an agreement to increase output from August. This was because the United Arab Emirates rejected a proposed eight-month extension to OPEC+ output curbs.

The world’s top oil exporter Saudi Arabia met full contractual demand for crude oil from five buyers in August, but turned down at least two requests for additional volumes.

Front-month WTI crude futures posted their sixth weekly gain last week after a bullish report from the U.S. Energy Information Administration showed U.S. crude and gasoline stocks fell while gasoline demand reached its highest since 2019.

In response to higher oil prices, U.S. energy firms added oil and natural gas rigs for a second week in a row, data from Baker Hughes showed.

By : Dmitry Zhdannikov, Sonali Paul and Florence Tan

Source: Oil prices slip after China cuts import quotas | Reuters

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