A Bank of America survey of 223 fund managers during the week ended May 14 found 68% see the recent run-up as a bear market rally, rather than the beginnings of a bull market run. A bear market identifies as a sustained period of downward trending stock prices, often sparked by a 20% market drop.
After a robust market rally through April and May, things are slowing down. A virus spike in Beijing is fuelling fears of a second coronavirus wave. This is creating a cautious pause on global market rallies and triggering the price of oil to fall again. If a second coronavirus wave takes hold globally, a significant market pull-back is likely. The impact will be bigger on stocks tied to an expected economic recovery such as travel and entertainment.
Forget day trading
In a bear market, stock price volatility is a given, so it can be tempting to get in and out of stocks quickly to make fast profits. This is not a good idea. Even the best day traders can realise big losses when market sentiment is low. I think a long-term investing strategy is a more sensible option. Something along the lines of Warren Buffett’s value investing strategy will bring you future wealth if you are disciplined and patient.
Robust stocks to buy in a bear market
The FTSE 100 is the UK’s most popular financial index and its constituents tend to be large-cap, stable companies. This is the first place I would look for robust stocks to buy in a downturn. Choosing stocks that will always be in demand, such as consumer staples, like food, alcohol, tobacco and toiletries is a good place to start. Utilities should also remain in demand, for example electricity, water and telecoms.
Energy generator and distributor SSE is a stock I would consider. The SSE share price has had a volatile time. In February it was flying high, reaching close to a 10-year pinnacle. Since then its shares have fluctuated a lot and are now down 28%.
With close to half of all FTSE 100 firms slashing their dividends in recent weeks, income investors are left with slim pickings. So far SSE is one company that has kept its dividend intact, but whether that will still be the case later this week remains to be seen. SSE will be revealing its full-year results on Wednesday.
Risky stocks to buy in a bear market
Oil and gas stocks are risky at the best of times, but a bear market can provide an opportunity to buy them cheaply. Fossil fuels are a necessary evil, but despite moves to have them phased out, this will not happen soon. They are still very much required and in time the oil price will rise again. However, not all oil stocks will survive, and recovery will be a lengthy process. BP and Shell are my favourite UK oil stocks because they have vast industry experience, they are investing heavily in renewables and have access to much more liquidity than many of their smaller industry peers.
I think another stock market crash is highly likely, but that does not mean you should stop investing. If you are careful about the stocks you choose and patient enough to see them rise again, you can still grow a sizeable portfolio for the future.
If you are looking for long-term investment opportunities, an income investing strategy is a great approach to take.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.