Bear Markets and Stocks That Are Inverse to the Market

Most of us know how to make money when the stock market is doing well (bull market), but what do we do when it isn’t (bear market)? Some stocks and Exchange Traded Fund (ETF) do well when the market is bleeding red. How is that even possible? Our post on bear markets and stocks that are inverse to the market will show you how. Below are a few examples of previous stock market crashes in the last decades and potential tools for future crashes.

A Short History of the Previous Market Crashes

There isn’t a set length of time or frequency for a bear market, but historically, they happen every 8-9 years. The percentage loss and recovery time are also unpredictable. Here are a few examples in the last decades.

Covid

We all remember March 2020, when global markets went into a frenzy in the early stages of COVID. Everyone was panicking about the dangers of COVID and its effects on the world economy. The SPY: SPDR S&P 500 Trust ETF is a diversified fund that tracks 500 companies in the US market dropped almost 35% from its February 19th high to its March 23rd low. This bear market lasted arguably just over one month and recovered within a few weeks. It has been inching ever since to an all-time high. For proof of stocks that are inverse to the market look no further than the image below. 

Bear Markets and Stocks that are Inverse to the Market

2007-2009

We have to go back to the first decade of the century for the last bear market when Bitcoins did not exist yet. Then, in 2007, borrowers could not pay their debts, and banks couldn’t collect their dues, especially for mortgages. This caused a global financial crisis for 15 months, which resulted in the SPY dropping by almost 52% during that span, but recovered after over a year.

Bear Markets and Stocks that are Inverse to the Market

2000-2002: Stocks That Are Inverse to the Market

Before that, at the turn of the century, the dot-com crash from 2000 to 2002, lasting 18 months, was caused by a rapid increase and creation in US tech stocks. Investors poured their money into those companies and artificially raised their prices. As a result, revenues were way below expectations, and cash flew out of these companies. As a result, many stocks lost significant portions of their capital and evaporated within months. Comprised chiefly of tech stocks, the NASDAQ index crashed by over 75% during that period and took almost a decade to recover.  

We can see that the length of the crash, the percentage drop and the recovery time have been very different in the last three crashes, which makes it very difficult to predict the outcome of the next crash. Nevertheless, below are a few tools to make a quick buck on investments that are affected differently in a bear market.

Good News 1: Stocks That Are Inverse to the Market

From hindsight, stocks that performed well during crashes are part of industries where demand is constant no matter the price, such as food retailers, fast food chains, and healthcare. These are essential products since we all need to buy groceries, cheap food, and we need to treat ourselves. Their prices will rarely drop or jump drastically, but they are safe bets during troubling times. At the beginning of any crash, stock prices naturally drop, but that doesn’t mean companies aren’t negatively impacted. We commonly see a drop in share price with an increase in earnings. Ultimately, many are unfazed by any economic downturn. 

In the chart below, we can see the comparison between the SPY index (in blue) mentioned previously and a giant multinational US company, Walmart (in red), from early 2007 until past the crash. Consumers were usually spending less during those difficult months, but not at Walmart. Ironically their sales grew, and they profited.

Bear Markets and Stocks that are Inverse to the Market

Note: Costco underperformed compared to Walmart during 2007-2009 but still finished ahead of the SPY index. Since COVID, Costco overperformed both the SPY and Walmart, while Walmart’s performance is below the SPY.

The same can be said for Mcdonald’s (in burgundy) during the same crash.

Bear Markets and Stocks that are Inverse to the Market

It is difficult to compare the month of turbulence in 2020 to previous crashes as it was due to sanitary measures as opposed to direct issues with the market like in previous crashes. If there is one thing we can conclude during this pandemic, companies with a lot of cash and in good financial standing remained open and took a lot of business away from smaller companies who struggled to remain open and satisfy all government demands. 

Good News 2: ETFS That Are Inverse to the Market

The S&P 500 VIX Short Term Futures Index (VIX) is a projection of market sentiment in the upcoming 30 days. Basically, the VIX tries to predict the market sentiment: fear or hope.

Below it is compared to the SPY Index, and we can see they trend inversely. VIX tends to rise during red days. This investment is for a shorter-term hold as it can quickly drop in price. In the long run, when markets are stable, we can see that it hovers around an average price. It is not possible to invest directly in this index, but some ETFs can reproduce it. How great is that? See our blog post here for more detailed coverage.

Bear Markets and Stocks that are Inverse to the Market

ETFS and Index Funds

Certain ETFs and Index funds replicate the performance of major retailers, consumer products, and healthcare. We saw from the earlier section that they tend to perform well during major crashes, or they are at least a safe bet for overperforming major indexes. They are also a solid alternative to putting all your eggs in one basket when investing in a single stock and hoping for the best. They will include major companies which were mentioned earlier, such as Walmart, Costco, McDonald’s, and tech stocks that fit in other sectors as well such as Amazon, but they also include smaller cap stocks. Overall, the risk is diminished during tougher times.

Dividends

Another option is sticking with ETFs with a regular dividend payout. Stocks pay out a dividend to their shareholders regularly (monthly, quarterly), which guarantees a certain income. They can be highly diversified, which adds additional protection for investors.

Stocks That Are Inverse to the Market Summary

Predicting what to do during a market crash isn’t easy. Fortunately, the market offers various tools for investors who wish to invest themselves (stocks) or for those who want others to take care of their money (ETF/Index). 

If you want to learn more about how you can profit from investing in stocks like Amazon, Costco and McDonalds, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts. 

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