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The Nasdaq Composite is down 28% from its all-time high while the S&P 500 is down 17% from its all-time high as investors react negatively to inflation and rising interest rates.
Over the last 25 years, we’ve seen five Nasdaq Composite bear markets: the dot-com burst of 2000 to 2002, the financial crisis from 2007 to 2009, the fall 2018 U.S.-China trade war-induced bear market, the 2020 COVID-19 bear market, and the bear market we are currently in.
When you’re in the thick of a bear market, it can be hard to have the confidence to buy — especially when the short-term outlook looks bleak. But historically speaking, every bear market has been a phenomenal buying opportunity. And yes, the dot-com burst produced by far the most life-changing wealth as stocks like Amazon (NASDAQ: AMZN) crashed 93% off their highs. But there’s a reason this article isn’t discussing the best buying opportunity in the last 25 years but rather the easiest. Here’s why I think it’s relatively easy to be a buyer in today’s bear market.
Image source: Getty Images.
1. Fundamentals are strong
There are exceptions, but overall, earnings season has gone pretty well as many companies are reporting impressive results and have the balance sheets needed to outlast a prolonged bear market.
A strong earnings season is very different from past bear markets. For example, several companies reported their worst results in decades in 2020 — like Walt Disney‘s first loss in decades, ExxonMobil‘s $22 billion loss, airline woes, and so on. In the great recession, earnings collapsed. And for companies with a global presence, earnings fell dramatically as a result of the U.S.-China trade war.
It’s also worth mentioning that unemployment is currently 3.6% — which is one of the lowest readings in decades, whereas past bear markets usually have much higher unemployment.
Recession-resistant dividend stocks in the consumer staples, healthcare, and utility sectors continue to do well thanks to their stable cash flows that can support dividends and stock buybacks. But even outside of those sectors, there are plenty of technology, industrial, consumer discretionary, and communications companies that continue to post quality top- and bottom-line growth.
Companies have learned from past downturns and seem to be well positioned to endure an economic slowdown. For example, many oil and gas companies have healthy balance sheets and large cash positions that will allow them to turn a profit even if oil and gas prices fall as demand declines. Many large tech companies (who will likely face slowing growth) have massive cash positions and positive free cash flow. They may post a few weak quarters if there’s a recession. But that doesn’t detract from the long-term thesis.
What’s more, many of the large tech companies that do shoulder debt have low interest rates on that debt. As an example, Apple has taken on debt in recent years and depleted its once-large cash position. But it pays just a 2.1% interest rate on that debt. Granted, rising interest rates make any new debt more expensive, which would hurt Apple if it’s overly dependent on debt in the short term (which is unlikely).
2. There are plenty of compelling buys
Although the broader indices aren’t down too bad from their highs, several individual growth stocks have seen their share prices taken to the woodshed. Many of the largest tech stocks are down 40% or more from their all-time highs — including Amazon, Meta Platforms, Nvidia, Salesforce, and Adobe. Granted, some of these companies were arguably overvalued, so investors shouldn’t anchor all-time highs as fair values by any means.
Investors that felt like they missed out on some of these companies can now buy them for a much-more attractive price relative to their long-term potential. 2022 and even 2023 results may not be stellar. But when you’re approaching an investment from a multiyear time horizon, it’s hard not to look at some of these companies as excellent buys now.
For investors looking for higher risk and higher reward, Shopify (NYSE: SHOP) is down over 80% from its all-time high — a drawdown that took place in just six months. Shopify is still an expensive stock, and its growth is slowing and likely will continue to slow if we go into a recession. But Shopify offers an incredible integrated suite of products and services that is poised to help its customers grow their business well into the future. By aligning its own interests with the interests of its customers, Shopify seems like it could be a long-term winner.
3. There’s an end in sight
The root cause of the 2022 bear market is rising interest rates in response to inflation. Inflation got out of hand because of high fiscal stimulus to get the U.S. out of a COVID-19-induced recession. Also, a supply/demand imbalance arose from years of underinvestment in key industries and the wild oscillations in demand since 2020. Therefore, the cause of this inflationary environment seems entirely reasonable. But it also seems like it’s only going to last maybe another year or two given rising interest rates will lower demand at the potential expense of a recession. Inflation is annoying and no one likes a recession. But at least this bear market makes sense and seems to have a logical start and finish.
The worst part of past bear markets was not knowing how bad they were going to get or when they would end. We don’t know the extent of how bad this bear market is going to be. But at least we have an idea of what an end in sight will look like.
In my personal opinion, I think the turning point will come once inflation falls below 5% and the Federal Reserve feels less inclined to raise interest rates. Between now and then, it remains to be seen the damage that will be inflicted on the broader economy. However, given that a lot of companies are at the top of their game (aside from inflation), now seems like a good time to invest as long as an investor is allocating capital they won’t need in the short or medium term.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Nvidia, Shopify, and Walt Disney and has the following options: long January 2024 $145 calls on Walt Disney, long July 2022 $145 calls on Walt Disney, long June 2022 $170 calls on Walt Disney, long June 2022 $400 calls on Adobe Inc., long September 2022 $600 calls on Shopify, short August 2022 $150 calls on Nvidia, short January 2023 $140 calls on Walt Disney, short January 2024 $150 calls on Walt Disney, short January 2024 $600 calls on Shopify, short July 2022 $150 calls on Walt Disney, short June 2022 $175 calls on Walt Disney, short June 2022 $425 calls on Adobe Inc., short November 2022 $120 calls on Walt Disney, short October 2022 $135 calls on Walt Disney, and short September 2022 $115 calls on Walt Disney. The Motley Fool has positions in and recommends Adobe Inc., Amazon, Apple, Meta Platforms, Inc., Nvidia, Salesforce.com, Shopify, and Walt Disney. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify, long January 2024 $145 calls on Walt Disney, long January 2024 $420 calls on Adobe Inc., long March 2023 $120 calls on Apple, short January 2023 $1,160 calls on Shopify, short January 2024 $155 calls on Walt Disney, short January 2024 $430 calls on Adobe Inc., and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
