Bear Market Blunders

By Patrick Donley and Shawn O'Malley, edited by Robert Leonard · October 14, 2022

*LinkedIn newsletter is posted at a one-day delay.

Happy Friday and welcome back???

After yesterday's head-spinning afternoon rally, U.S. stocks fell today following a University of Michigan survey that showed one-year inflation expectations rose in early October and the long-term outlook also crept up.

??Yesterday's yo-yo-like activity marked the first time the Dow Jones fell at least 500 points and rose at least 800 points in a single trading day.

American banks offered some bright spots as both JPMorgan Chase and Wells Fargo shares rose after their earnings were reported (more below).

Here's the market rundown:

MARKETS

*All prices as of market close at 4pm EST

Today, we'll discuss a consolidation in the grocery industry, 3rd quarter banking results, more on the unfolding saga in the U.K., and how to avoid the top four bear market mistakes.

All this, and more, in just?5?minutes to read.

Let's go!???

IN THE NEWS

???Kroger to Buy Albertsons?(WSJ)?

Explained:?

• Kroger (KR) announced it will be buying its rival Albertsons (ACI) for $24.6 billion in one of the biggest deals in the history of the grocery industry.?
• By combining, the two companies will gain greater scale and negotiating leverage while putting them in a position to better compete with Walmart (WMT) and Amazon (AMZN).?

What to know:?

• Kroger will acquire Albertsons for $34.10 a share and assume roughly $4.7 billion of Albertsons' net debt. As part of the deal, Albertsons will pay a special cash dividend of up to $4 billion to its shareholders.
• Kroger and Albertsons could control about 13% of the U.S. retail food sales following some store divestitures, which will be needed to obtain regulatory approval. Walmart's share of retail food sales is 22%.
• Kroger plans on directing about $500 million in anticipated cost savings to reduce prices for its customers. About $1.3 billion will be invested into Albertsons stores.

???Banking Headwinds?(Reuters)?

Explained:?

• Major banks and financial institutions kicked off their earnings reports in a flurry Friday morning. In the third quarter, profits dipped at Wall Street's biggest banks in the third quarter as they braced for a weaker economy amid dried-up dealmaking in investment banking.
• Investors saw a silver lining as some shares gained, and JPMorgan (JPM) beat analysts' estimates.

What to know:?

• JPMorgan, Morgan Stanley (MS), Citigroup (C), and Wells Fargo (WFC) showed a slide in net income after volatile markets choked off investment banking activity and lenders set aside more funds for loan-loss reserves.
• JPMorgan's Jamie Dimon said there were "significant headwinds immediately in front of us." including stubbornly high inflation, higher global interest rates, the uncertainty of quantitative tightening, the war in Ukraine, and the delicate state of oil supply and prices.
• Morgan Stanley, Citigroup, and Wells Fargo notched slumps in profits of 30%, 25%, and 31%, respectively.

???UK U-Turn (FT)

Explained:

• The UK's Prime Minister, Liz Truss, has fired her Treasury chief Kwasi Kwarteng to salvage her tenure amid pressure from her Conservative party and international markets.
• Truss is expected to reverse key parts of her planned tax cuts today, as her economic plan to stimulate the U.K. into growth unravels after a backlash from financial markets and her party.

What to know:

• The Prime Minister's plan for a British version of Reaganomics was launched three weeks ago. Since then, the pound has hit a record low against the dollar, the Bank of England has stepped in to support the government bond market, and the Conservative Party's support in the opinion polls has tanked to record lows.
• Tax cuts were a prominent feature in Truss's campaign and a reversal will represent a political disaster for her.?
• U.K. bonds have already staged a recovery from the week's lows as markets have increasingly anticipated a U-turn on the tax cuts.

ONE BIG THING

This chart was circulating on Twitter yesterday. Is it the death of the traditional 60/40 portfolio??

We wrote about the possible failures of the 60/40 portfolio in our very?first newsletter.

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DIVE DEEPER: TOP 4 BEAR MARKET MISTAKES

I (Patrick) have a confession.

I haven't opened my brokerage account to look at my performance in the past month or two.?

Partly, it's because I got married, had a honeymoon, and have been busy with work at?The Investor's Podcast Network. But, mostly, it's because I know it will pain me, and I'm afraid to see what awaits me.

Sticking my head in the sand isn't the wisest course of action, but it's kept me from committing any of the top four mistakes individual investors make during a bear market.

I dove into an?article?by Dan Hunt, Senior Investment Strategist at Morgan Stanley, to find out what those bear market blunders are and what to do instead.

Top Four Bear Market Mistakes

? Panic selling?—?There's no question that bear markets are troubling for investors, and the number one mistake people make is panic selling during a downturn. Watching your retirement accounts or investment portfolio take a nose dive is emotionally troubling.

To stop the bleeding, many investors attempt to salvage what they can, sell their holdings, and wait for the dust to settle. This action can be the single most detrimental thing an investor can do.?

Selling into a falling market ensures you'll lock in your losses. If you wait years to get back in, you may never recover and as we often say, time in the market is more important than timing the market.

Do this instead:?Take the long view and don't listen to your reptilian brain. Supposing you have a well-researched portfolio of companies within your circle of competence and don't need the cash, it's best to realize that downturns are generally temporary and hold tight.

? They go to cash and stay there?—?After panic selling, many investors move to the perceived safety of cash and stay there. This mistake can compound the damage caused by hitting the panic button.?

Share prices often rebound following a market correction, and staying in cash can severely hamper one's returns. For example, many investors panicked in the initial downturn of March 2020, moved to cash, and missed the rebound that quickly happened.?

Do this instead:?Hunt recommends that investors re-invest gradually after panic selling. Dollar-cost averaging is a great method to invest equal amounts of money at regular intervals systematically, which reduces the sensitivity of your portfolio to market timing risks.

They become overconfident and make bad decisions

Individual investors can often?get overconfident during a downturn and attempt to "catch falling knives." It's easy to think you're buying a bargain, particularly when you look at a company's previous higher price. However, this behavior can easily backfire and leave us with a portfolio in disarray and even bigger losses.?

Do this instead:?Hunt recommends finding a financial advisor you trust to go through your portfolio with you and discuss how to proceed based on your time horizon and risk tolerance.

? They dig a deeper hole?—?It's common for investors to detest the idea of selling an investment at a loss and to hold on to losers believing the stock will rise again. They keep waiting and waiting while their losses compound. Conversely, they will often sell winners too early because they worry those stocks will decline.?

This behavior of keeping assets that have dropped and value and selling assets that have increased is known as the "disposition effect" in behavioral finance. It's something we want to avoid.?

Do this instead:?If losses arise in a taxable investment account, consider "tax-loss harvesting" by selling those positions to improve your long-term tax efficiency. Also, Hunt recommends?moving a portion of your investments from a traditional IRA to a Roth IRA. Since this conversion has tax consequences, it is wise to it do when stock values are depressed.

Half the battle for investment success lies in "trying to be consistently not stupid, instead of trying to be very intelligent," as Charlie Munger has said.?

Eliminate these common bear market mistakes, and you'll be well on your way to profitably compounding your investment capital.?

Readers — Tell me I'm not the only one that hasn't recently opened their brokerage account.?

SEE YOU NEXT TIME!

That's it for today on?We Study Markets!?

See you later!

All the best,?

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