Opportunities for investors in this bear market

Looking back over that last 20 years you can find many excellent buying opportunities in stocks, but each saw investors sitting on the sidelines as each bear market scared investors away.

Bear markets and recessions provide a good time to invest in stocks, and it is important to exercise patience.

While not all bear markets precede a recession, most do. That along with the inverted yield curve and the Federal Reserve Board's continued statements about slaying inflation and raising the unemployment rate make it likely the economy will suffer a recession in 2023.

Bear market recoveries

The bear market may already be finished as the broad market is showing more signs of strength than the S&P 500. On the other hand if we have a recession in 2023, the market may test the lows of October 2022. Investing for the recovery is wiser than trying to pick the bottom.

So the more important question is how long may the recovery take? While each bear market is different, we can see some consistent recovery patterns.

There have been 13 bear markets (declines of at least 20%) since World War II with an average decline of over 32% and an average length of 14.5 months (Source: Goldman Sachs, CNBC). This bear market has lasted 13 months so far and has dropped 25%. Historically, the average recovery time is twice the length of the decline.

Based on these averages, don't expect the U.S. stock market to make a new high until sometime in 2025. If we have a recession in 2023, the recovery could take longer as this bear market bottom may not yet be in place. That makes this environment ripe for dollar cost averaging.

Dollar-cost averaging involves investing the same dollar amount systematically. It is most effective when done for years during bear markets and recessions. The discipline of making regular investments in difficult market environments helps you overcome fear when the market is struggling.

Here are some things to consider as you allocate your investments.

One-year outlook

Changes to the S&P 500 have weighted the average more toward energy and while reducing tech exposure. Corporations having built out their cloud infrastructure may begin to focus on A.I. projects.

Short-term bonds and cash alternatives now pay you a reasonable return with the two-year Treasury bond paying over 4% and iBonds paying 6.89% (as of Jan 30) making bonds much more attractive than the last five years.

Diversification may again start to provide more reliable returns as interest rates have risen making bonds more attractive. International stocks are less expensive than U.S. stocks potentially resulting in higher returns. Recognize that all investing involves risk, even Treasury bonds, and there is no guarantee that historical trends will hold true today. So seek help in your portfolio design.

Three-year outlook

By 2026 the recession will likely be behind us and there is a good chance inflation may surge again. Since the financial crisis of 2008, the Fed has injected $9 trillion into the financial system and Washington has borrowed over $21 trillion for a total of over $30 trillion of stimulus. That is a lot of fuel for inflation.

If interest rates stay at the current level the interest cost on Treasury bonds will continue to rise as older lower yielding bonds mature being refinanced as higher rates. This will further pressure Washington's budget deficits, increasing the debt and providing more fuel for inflation. This may provide a good environment for natural resource investments similar to the 1960s and '70s.

Adding more demand to this sector is the significant need for copper to provide the necessary material for renewable energy investments.

Five-year outlook

If the historical pattern of recoveries holds true, global stock markets will likely have made new highs and may reward those investors that utilized dollar-cost averaging. This longer-term perspective can help you overcome the fear of the current stock market volatility.

I recommend meeting with a financial adviser to map out your personal strategy. If you have more questions about when you can retire, how to reduce your tax liability and how to reach you other goals, a CFP professional can provide a more comprehensive look at your finances.

• Securities offered through Royal Alliance Associates, Inc., Member FINRA/SIPC. Investment advisory services offered through Phase 3 Advisory Services, LTD., a registered investment adviser not affiliated with Royal Alliance Associates, Inc., 1110 W. Lake-Cook Road, Buffalo Grove, IL 60089, (847) 520-5545.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note the individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Dollar-cost averaging plans do not assure a profit or protect against a loss in declining markets. Such plans involve continuous investment in securities regardless of fluctuating price levels. Investors should consider their financial ab8ility to continue purchases through periods of low price levels.

The price of commodities is subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.