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Stocks Already Behaving Like It's a Bear Market

We're not even in a bear market, but stocks seem to be acting like it's already here.

Fueled by worries about a U.S. recession, the markets went into near-panic mode this week, sending the major indexes plunging to near the 20% declines that characterize a bear market. Even the Federal Reserve had to step in with an emergency rate cut, though it did little to calm the already jittery markets.

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CNBC.com

As a result, stocks are likely to continue behaving like they're in a bear market even if they're technically not. That means more volatility and more declines followed by brief, somewhat tepid, rallies.

For investors, that isn't necessarily a bad thing. Because there are always ways to profit in a down market. It just depends on what approach you take.

Some have sold into the slump, while others have bought into it and plan to continue buing no matter how dire the predictions.

"Some Appealing Situations"

"This entire month we've been active, looking through the ashes for companies that are somewhat economically sensitive and great companies, good value," says Pat Becker Jr. portfolio manager at Becker Value Equity Fund in Indianapolis. "I don't know if the worst is over, but when you look at valuation ... there are some appealing situations out there."

In a nervous market, Becker recommends Federal Express and Starwood Hotels for investors looking for quality over the long term.

And it's the long term that investment managers are urging clients to look at, instead of paying attention to each quiver in the market that can reverse literally in minutes.

The Dow Jones Industrial Average, for instance, had a 600-point swing on Wednesday before closing up nearly 300 points.

The biggest declines came in Asia and Europe this week, especially on Monday, when worries about a US recession sent markets plummeting. Ironically, both Asia and Europe ended up on Friday at about the same place they began on Monday. Sound and fury indeed.

"If you can't stomach the volatility and you're not willing to be in this for at least five years, you shouldn't be in equities, period," says Tom Papanikolaou, chief operating officer at Pension Builders & Consultants in Westlake, Ohio.

Pension Builders encourages diversification and what it calls "tactical passive" investment in which the firm scours the best of the index funds and compiles them in a single vehicle. The firm also recommends an international portfolio that allocates assets equally across 10 major sectors.

For those investors looking to be a bit more daring but still in a comfort zone, Todd Schoenberger, director of brokerage at USAA, endorses down-market stalwarts like consumer staples and health care.

"If investors are willing to assume the risk of being in equities, those are probably the two sectors that they should take a look at," Schoenberger said.

Tobacco has been one of the leading consumer industries over the past several days, with Imperial Tobacco soaring Friday on news that its $18.26 billion offer for Altadis had been accepted.

Financials Still Popular

Many investors have been turning back to financials, even though the subprime debacle seems to be far from over. Rich Berg, of Performance Capital Trust Partners, recommends bank stocks while discouraging short selling and Treasury bonds.

"This is a market I would never short. It's too dangerous in my opinion," Berg says. "You're better off being long because the momentum looks good and the fundamentals look excellent."

Financials, though, are a sore spot among investment professionals, who debate whether everything has shaken out yet from the credit crisis fallout.

"We're still flying with instruments with regard to earnings in '08. I don't think that clears up until maybe March, April," said Phil Dow, of RBC Dain Rauscher. "For fundamentally driven investors there still are some questions to be answered."

Dow recommends health care, technology and natural gas exploration as safe sectors for a market that believes the economy will continue to be weak. Transocean is among the leaders in natural gas exploration, though the stock has slid some over the past month.

"I don't know whether we're in a recession or not. The market's kind of acting like we might be going into one," Dow said. "Having said that, there still are very attractive opportunities even though we don't know a lot about earnings for the year."

Brian Westbury of First Trust Advisors believes concerns over subprime's effect on the economy are overblown.

"I think people need to calm down and realize this whole subprime loan problem is at most two or 300 billion dollars, that's it," Westbury said. "This is just too small of a problem to cause all this panic."

Experts in market psychology advise investors to decide just how much volatility they can stand before getting into stocks.

"A lot of investors are reacting to panic and fear," said James Grubman, adjunct professor at Bentley College where he teaches the psychology of financial planning. "That is feeding on itself and so this is a time when understanding what your risk tolerance is and being able to tolerate some of the anxiety of the markets is really important to keep your head about you."