What Wall Street strategists recommend doing in this bear market

The year has been grueling to those holding almost every type of stock. The S&P 500 (^GSPC) is down 16% year-to-date. The Nasdaq (^IXIC) is down 24% during that same period. Even the energy sector (XLE) — the only one positive year-to-date — has seen some of its gains evaporate recently.

In a new Yahoo Finance series, we’re looking at some of the strategies experts recommend for how to navigate a bear market. To kick things off, we asked them what they think investors should do in an environment of tighter monetary policy and the threat of a recession.

We’ve seen some rally days over these last couple of weeks. Have the markets bottomed? What should investors do now?

“The names that have really benefited since mid-June and the last Federal Reserve meeting have been the highest beta areas of the market. Some of the names that are sort of non-profitable technology would be a way to sum that up,” Chris Pollard, Cowen managing director and head of market Strategy told Yahoo Finance Live.

“Those are the names that have had very pronounced movements and this is a way to sort of pair back on those exposures,” P added. “I think using this time, this countertrend movement, to raise some cash and to provide yourself some optionality for what should be a push towards new lows, is what we would be advising here.”

“The movement that we’ve seen over the last couple of weeks is unlikely to be durable upside,” he noted.

When will capitulation happen?

“That’s another way of saying, ‘When do I come in and buy’. The real capitulation happens when people say ‘don’t even talk to me about this anymore,'” Interactive Brokers’ chief strategist, Steve Sosnick told Yahoo Finance Live.

“We’re still in a bear market and we still are seeing the Fed as a headwind,” he said.

The Federal Reserve is expected to raise rates at their next meeting next week. Tighter monetary policy has been a headwind for stocks as liquidity dries up.

“Don’t be seduced” by “short, sharp, and ferocious bear market rallies,” he advised.

“You really don’t get bottoms unless you see change in fiscal or monetary policy. I don’t see that right now,” he added.

Should investors hold onto stocks which have lost money?

Some experts say this depends on the company in question and the time horizon of the investor.

“The average bear market for the broader S&P 500 has taken roughly a year to bottom, but this can be much longer for individual equities (if they recover at all),” Ross Mayfield, Investment Strategy analyst at Baird told Yahoo Finance.

“Investors should ask themselves if the investing case for owning the stock has fundamentally changed and what the timeline for the invested money actually is,” he added.

He also noted, “Market volatility and selloffs are simply part of the experience for the longer-term investor – they occur with regularity but have always eventually ended with the market making new highs. Further, holding cash in an attempt to perfectly time the market bottom is a very risky proposition that can result in someone missing the rally that starts the new bull market.”

Bearish scenario in stock market with bear figure in front of red price drop chart.

How do investors prepare their portfolio in light of an economic slowdown, or a recession?

“When we look at the percentage probabilities of wether we’re going to tip over into a recession or wether we’re just going to see a slowing growth environment. We give a slight edge to the slowing growth environment, simply because of the strength of the consumer coming into this,” Kristen Bitterly, CIti Global Wealth head of North American investments told Yahoo Finance.

She recommends “creating some strong diversification within the portfolio across fixed income and equities. And really leaning into quality and being relatively conservative when it comes to stretching for yield, or extending yourself when it comes to credit,” she added.

“I think there is a portfolio solution here as an investor, to remain fully invested, but ensuring that you have raised quality across equities and fixed income,” said Bitterly.

Are some stocks simply oversold?

Valuations have come down significantly.

Allspring Global Investments Senior Investment Strategist Brian Jacobsen told Yahoo Finance that one of the areas he likes is are consumer staples side and the technology.

“It’s almost like a barbell approach here where there are a number of names that seem that they probably got thrown under the bus so to speak as people got a little bit more pessimistic thinking that the Fed might induce a recession as they try to tame inflation,” he added.

Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre

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