Investment strategy: How investors should behave in the bear market

Fear is not an investment strategy

We are in the eye of a storm: While fear of inflation and recession dominates Wall Street, Main Street companies are seeing full order books. The latter, however, are suffering from disrupted supply chains and a huge shortage of workers. In such stormy times, we do well to remember the basics: Fear is not an investment strategy. But how can investors deal with bear markets?

Stormy times on the stock market: Bear markets

The two-year bull market, which followed the bear market at the beginning of pandemic on March 23, 2020, is over. Since its last peak, the S&P 500, the most important global benchmark, has lost more than 20%1. This magic mark of -20% turns the "correction" into a "bear market." These are historically rare and usually offer good investment opportunities.

The last bear markets, for example, occurred in 2020 during the coronavirus crisis or two years earlier during the financial crisis. But the current bear market may be comparable to that of 1987. The latter was triggered by the sudden fear of a recession – which then did not materialize. The bear market lasted about four months at the time and recorded the strongest recovery – as always – following the darkest day.

Bear market – a school for investors

In the current bear market, US stocks have lost significantly more than, say, Swiss stocks. This is due not least to the 25% weight of the "magnificent eight" stocks, the American mega caps, which are particularly affected by the rise in US interest rates. Such an investor capitulation is extraordinary and could not be foreseen. What happens now?

Three timeless stock market lessons can provide guidance to investors in these complicated times:

1. Fear is not a permanent state of affairs on stock markets

Keeping a cool head has proved its worth in the stock markets. This is especially true when panic is spreading among investors. In the end, the stock markets always follow the economy or corporate profits. This will also be the case in the future.

2. Bear markets have the effect of singular shocks

It's difficult to hedge against bear markets. This is also not advisable, because it usually costs more than the losses incurred. The best way to protect your investments is by diversifying them well. The Credit Suisse Investment Committee's strategic underweight in government bonds and its alternative investments were particularly valuable this year for investors –virtually amounting to diversification for "free."

Investment strategy: Cash loses in the long term

Investment strategy: Cash almost always loses in the long run due to inflation

Development of the purchasing power of CHF 100 from 1980 to 2020, in Swiss francs

Source: Bloomberg, Credit Suisse / Historical performance indicators and financial market scenarios are not reliable indicators of future performance.
Last data point: 2020

3) Cash is sometimes, but rarely, king

And last of all: In the long run, cash loses against stocks and bonds in any currency. This is true even for the strongest currency, the Swiss franc. Since 1980, the purchasing power of the Swiss franc has almost been cut in half as a result of inflation. By contrast, since 1990, the value of a globally diversified stock/bond portfolio, adjusted to 60/40 each year, has risen from USD 100 to USD 1,634.

1The source for market data is Refinitiv, as of June 15, 2022, unless otherwise stated. Historical performance and financial market scenarios are not reliable indicators of future performance. You cannot invest in an index. The index returns shown do not represent the results of actual trading of investable assets/securities. Investors pursuing a strategy analogous to an index can achieve lower or higher returns and have to take into account the associated costs.

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