The Bear Market in 2023: How can you succeed in the time of pandemic and new normal

The Philippine stock market has faced significant challenges over the past few years, with stocks experiencing their most substantial decline in four years. Some financial analysts predict that the market is heading toward a bear market, creating uncertainty among investors. The last time the stock market saw similar levels was in October 2020, during the early months of the pandemic, and previously in 2014, before the global health crisis.

Understanding how to navigate a bear market is essential for investors looking to protect their wealth and make strategic investments. Whether you are a seasoned trader or a beginner, it’s crucial to grasp the implications of economic downturns and prepare for market volatility. This article will discuss the factors affecting the stock market, how the bear market impacts the economy, and investment strategies to succeed during uncertain times.

Understanding the Bear Market and Its Impact on the Economy

A bear market occurs when stock prices decline by 20% or more from recent highs, often triggered by economic downturns, geopolitical uncertainties, or investor panic. In February 2020, when concerns over the global pandemic intensified, the Philippine Stock Exchange Index (PSEi) dropped by 3.9% to 6,909.84, marking a three-day decline of 6.0%. Analysts at Papa Securities Corp. projected that the index might reach 6,692.23 in the coming months due to fears surrounding the pandemic’s economic effects.

Despite only three confirmed COVID-19 cases in the Philippines at the time, fears of a bear market spread across the country. The benchmark index hovered just 3% away from bear market territory, while year-to-date losses climbed to approximately 12%, ranking among the worst global market performances alongside Lebanon and Thailand.

Adding to investor concerns, political instability and regulatory challenges weighed on Philippine stocks. Before the pandemic, major financial institutions such as BDO Unibank Inc. and First Metro Investment had forecasted a double-digit increase in stock market performance for 2020. However, as the global health crisis unfolded, corporate earnings took a hit, affecting supply chains and consumer behavior. Experts cautioned that stock market rallies would likely be short-lived as the risk-averse sentiment continued to dominate global markets.

 

Philippine Stock Exchange Enters Bear Market Territory

The Philippine Stock Exchange (PSE) officially entered a bear market on September 27, 2022, when its composite index fell more than 239.47 points. The PSEi dropped to 6,041 points, even hitting a daily low of 5,962.17 before slightly recovering to 6,007 points.

This downward trend was largely attributed to rising inflation, the peso’s devaluation against the US dollar, and interest rate hikes. The US Federal Reserve’s 0.75% interest rate increase to combat inflation further impacted global stock markets, weakening investor confidence. In response, Bangko Sentral ng Pilipinas (BSP) considered additional rate hikes to stabilize the peso and manage inflationary pressures.

Despite these challenges, analysts from First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) projected that the Philippine peso could strengthen in November 2022, as overseas Filipino worker (OFW) remittances increased during the holiday season. If inflation rates remain above 6.5%, BSP is expected to implement another 25-basis-point hike before the year ends.

 

Investment Strategies for a Bear Market During the Pandemic and New Normal

While a bear market presents challenges, it also offers strategic investment opportunities for those who understand how to navigate it effectively. The following strategies can help investors make informed financial decisions during a market downturn:

1. Buy High-Quality Stocks at Discounted Prices

One of the most effective strategies during a bear market is purchasing stocks at reduced prices. However, not all stocks will recover equally after a market downturn. It is crucial to focus on financially stable companies that have survived previous recessions and possess strong fundamentals.

Investors often turn to “toothpaste stocks”, referring to shares of companies that produce essential goods and services. These businesses provide everyday necessities, such as food, healthcare products, and utilities, making them more resilient during economic slowdowns. By investing in established companies with consistent revenue streams, investors can position themselves for long-term gains when the market rebounds.

2. Continue Contributing to Investment Funds

If you have a well-structured investment portfolio, such as a 401(k) or index funds, it’s advisable to continue making contributions even as the bear market unfolds. While initial declines may lower portfolio values, buying at lower prices allows investors to accumulate assets at a discount.

When the market eventually shifts into a bull market, those who maintained regular investments will benefit from higher returns as stock prices rise. Adopting a long-term investment mindset rather than making emotional decisions based on short-term fluctuations can result in significant wealth accumulation over time.

3. Diversify With Bonds and Precious Metals

In uncertain times, bonds and precious metals like gold and silver tend to perform well, providing stability and protection against stock market volatility. As stock prices drop and interest rates fluctuate, government and corporate bonds become attractive due to their relatively lower risk and fixed returns.

Precious metals, particularly gold, have historically been safe-haven assets that investors turn to during financial crises. Allocating a portion of your portfolio to bonds, gold, or exchange-traded funds (ETFs) focused on precious metals can help minimize risk and enhance portfolio resilience during a bear market.

4. Adjust Asset Allocation to Reduce Risk Exposure

Portfolio performance is significantly influenced by asset allocation, which determines how investments are distributed across various asset classes. During a bear market, investors may consider reducing exposure to high-risk stocks while increasing allocations to bonds, money market funds, and defensive stocks.

For example, if your typical portfolio allocation consists of 65% stocks, 30% bonds, and 5% cash, shifting to a 50% stocks, 30% bonds, and 20% cash allocation during a market downturn can lower risk and provide liquidity for future investment opportunities.

By maintaining a balanced approach and rebalancing periodically, investors can mitigate losses and position themselves for future market recoveries.

Final Thoughts on Navigating a Bear Market in 2023

A bear market can be a challenging period for investors, but it also presents valuable opportunities for those who remain patient, strategic, and well-informed. Market downturns are a natural part of the economic cycle, and while they may cause short-term losses, long-term investors who stay committed to smart investment strategies can emerge stronger when markets recover.

Understanding market conditions, diversifying investments, and making data-driven financial decisions are key to thriving during uncertain times. As history has shown, the average duration of a bear market is one year, meaning that by the time analysts officially declare a recession, the worst of the market decline may already be behind us.

By focusing on high-quality investments, maintaining consistent contributions, and strategically adjusting portfolios, investors can weather the storm and prepare for the next bull market. The key to success in a bear market lies in staying informed, remaining disciplined, and adopting a long-term perspective on wealth-building.

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