You Don't Always Need to Lose Money in a Bear Market

The joy of uncorrelated assets... Two things that zig when stocks zag... Why energy stocks are going up... What the dollar can do for you... You don't always need to lose money in a bear market... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] The joy of uncorrelated assets... Two things that zig when stocks zag... Why energy stocks are going up... What the dollar can do for you... You don't always need to lose money in a bear market... --------------------------------------------------------------- There's a joy in finding 'uncorrelated assets'... Simply put, "uncorrelated assets" means something you can invest in that tends to go up in value when the stock market goes down, or vice versa. This concept often surprises new investors right off the bat... After all, the big indexes like the U.S. benchmark S&P 500 get the most attention among most casual investors and make the most headlines. The same goes for the conventional 60/40 stock-bond portfolio. But these things are only a piece of the investing puzzle... If you're interested in really building your investment portfolio over the long run, investible assets that move the opposite way of stocks are invaluable. We're seeing that this year with stock indexes down 20% to 30% and many individual stocks doing much worse. It's the same story with bonds, typically thought of as an uncorrelated asset to stocks. That's been true for most of the past few decades, but high inflation has bucked the trend in a big way this year, given high inflation... to many folks' surprise ([though not ours](. These uncorrelated assets are most essential in a bear market, when stocks in general are falling. The simplest way to find these bundles of portfolio joy is with a simple number. For example, a 1-to-1, or 1.00 correlation, indicates a perfect correlation, meaning Asset A and Asset B have been shown to rise and fall by the same value in the same time frame. Lower numbers mean the assets have less of a correlation. For instance, a study by the investment firm Guggenheim found that from 2011 to 2021, the S&P 500 had a 0.51 correlation to commodities... Most asset classes that investors dabble in are correlated at least somewhat to the big stock indexes. But there are some that aren't. A negative correlation indicates assets that tend to move opposite of each other over the same time period. A perfect inverse relationship would be -1. The same study from Guggenheim found that the S&P 500 had a negative 0.33 correlation to currencies over the previous decade... and only two other major asset classes had a negative correlation: cash and bonds. Thinking about this and, importantly, acting on the idea is how you can achieve the kind of healthy diversification in a portfolio that allows you to protect and grow your wealth in any market conditions. So, here is some good news... Today, I (Corey McLaughlin) am going to share a look at not one, but two uncorrelated assets... The first was highlighted by our Portfolio Solutions team in their most recent issue, [published last night](. It's actually part of the stock market – a sector of commodity stocks that has been zigging higher even as the broad indexes have fallen in 2022. And the second uncorrelated asset happens to be part of the "bottom is (probably) in" checklist I am putting together, which makes sense... because for stocks to bottom, this asset has to peak. And to this point, at the end of today's essay, I'll also share a third idea for those who feel like they're still struggling to manage their stock allocations... and are worried about more risk ahead. A word of warning before we get into this... I am not suggesting you sell all your stocks today. Nor do we make official trade recommendations in the Digest. And I certainly wouldn't encourage anyone, officially or otherwise, to pour all their money into the opportunities I'll discuss today. Still, it's valuable for folks to be aware of the other options that are out there. There are better ways than simply buying and holding the major indexes or a 60/40 portfolio and hoping things get better. Hope can be a nice thing to have in life, but it's not exactly an investment strategy. Having exposure to uncorrelated assets gives you a truly diversified portfolio. Today was a perfect example... Today, the major U.S. indexes finished down slightly and were down anywhere from 1% to 2% in the morning. Meanwhile, these two uncorrelated assets I'm talking about closed up 2% and more than 1%, respectively... Drumroll, please... The first uncorrelated asset is energy stocks, which you can easily track using the Energy Select Sector SPDR Fund (XLE). Given that this exchange-traded fund ("ETF") is heavily weighted toward oil majors like ExxonMobil (XOM) and Chevron (CVX), it tends to trade in line with oil prices. This fund is up more than 40% since the start the year. The second uncorrelated asset is the U.S. dollar. As we've talked about all year, the dollar has been getting stronger relative to other major currencies, up 16% year to date. Meanwhile, the S&P 500 is down about 20%. As we've reported over the past week, the "stronger dollar" story is becoming an increasingly bigger part of the global geopolitical discussion... But today, we'll focus on it as an uncorrelated asset to stocks. Let's get into energy stocks first... The story with energy stocks is a story about energy prices, inflation, and the Federal Reserve's next moves, too... First, as our colleague Brett Eversole has [recently written here]( while a lot of the world has dreams of a "green energy" future, the world currently relies on oil and fossil fuels for its energy needs. This has become crystal clear to more people given the war in Eastern Europe... The higher oil and natural gas prices are, the more money there is for companies that produce, distribute, and sell this energy. Now, usually oil and energy prices move in tandem with stocks. Both can indicate either growing or slowing economic activity. As our Director of Research Matt Weinschenk wrote in the most recent issue of Portfolio Solutions... This is why you'd consider energy stocks a "cyclical" investment that moves with the market cycle. But as Matt also said, "No market deity writes these financial-market relationships in stone," and that the relationship has changed today... Energy prices account for a huge chunk of whatever inflation measure you want to use. It could be the headline-grabbing consumer price index, the utility bill that shows up in your mail, or the cost of gassing up your car. And inflation is public enemy No. 1 for the Federal Reserve and other major central banks... They want to slow the economy to lower demand for goods and services, presumably hurting energy prices and high inflation, too. But people still need to use energy. And companies and certain countries still want to make profits... while energy supplies can be limited. To that point... Oil prices have been going higher lately... In all, oil prices and shares of energy companies are down from their highs this summer as fears of a recession have spanned the globe. But the oil benchmarks are up about 10% since last Monday... and XLE is up 17% in the same span. The price of Brent crude – the international benchmark – was up roughly 2% today to around $93 per barrel... West Texas Intermediate was up about the same percentage to $88 per barrel. The movement has been chalked up to speculation about what was made official today... Today, the OPEC+ oil cartel of major oil-producing countries, which includes Russia, decided to collectively reduce production by 2 million barrels per day. This move ignores calls from the U.S. for the group to boost production to help the global economy. Speaking at a press conference, OPEC Secretary General Haitham Al Ghais said the cut was intended to bring "security [and] stability to the energy markets." Meanwhile, the White House said in a statement today that President Joe Biden was... Disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin's invasion of Ukraine. In response, the administration now also said it is directing the Department of Energy to release another 10 million barrels from the Strategic Petroleum Reserve next month. (You might have noticed gas prices rising again lately...) But the point is... The price of oil (and energy stocks) is getting pulled in an unusual way... These prices have not been moving in tandem with expectations for economic growth or a slowdown, as is usually the case. As Matt illustrated, this has happened occasionally before, and now is another of these times... The lower panel of the next chart shows the 90-day correlation between oil prices and stocks. From 2008 through 2022, the correlation was strongly positive. But since the start of this year, it has been low and at times negative... Despite the complexity of our economic situation, what's happening here is simple. When oil prices rise, investors fear that inflation numbers will stay higher for longer. In turn, they expect more hawkish behavior from the U.S. Federal Reserve. ("Hawkish" means inclined to raise interest rates.) And that threat of higher interest rates drives stocks down. When oil prices cool, the opposite happens. Inflation and Fed fears abate, and stocks can rise again. That's counter to an economy which, in noninflationary times, cheers oil prices as a sign of healthy activity. As Matt put it, the oil game has changed, and it offers an opportunity for folks willing to bet on energy companies today. Here's how he explained it to Portfolio Solutions subscribers... By adding energy stocks to our portfolio, we can use their uncorrelated nature to protect our portfolio so long as the relationship holds between oil prices, inflation, the Fed, and stocks. If energy prices decline, we'll likely be rewarded in the rest of our portfolio. And if energy prices soar, our gains will likely offset economic challenges that confront the rest of our holdings. So we're hedged on both sides. And through all of it, we'll hold our normal collection of quality businesses as they continue to generate big cash flows even at current prices. What's also interesting to me is that energy stocks aren't inversely correlated to the stock market so much as moving independently... For example, Monday was an up day for the broader stock market. Energy stocks led the stock market rally and outperformed, up 6% as a sector. Then today, U.S. markets fell a little... and energy stocks were up another 2%. That's the best of both worlds... I'm not saying this will happen every day, but if you're looking for something that goes up when stocks go down – or vice versa, or at least by not as much as the market in general – energy stocks are a place to look. It is why Matt and the team added a pair of oil and gas-related recommendations to the growth-focused allocation in their latest Portfolio Solutions update... The second 'uncorrelated' asset is one we've talked a good amount about... It's those George Washingtons... the U.S. dollar. I won't get into rehashing too much detail. But generally speaking, the Fed's rising interest rates have strengthened the dollar relative to other major world currencies, while simultaneously pushing stocks down. Conversely, when the dollar has gotten relatively weaker, stocks have gone higher during bear market rallies. The U.S. Dollar Index ("DXY") measures the dollar against the euro, pound, Swiss franc, Japanese yen, Canadian dollar, and Swedish krona. Here's how this index has performed relative to the S&P 500... This is why a weaker U.S. dollar is the second item in my "bottom is (probably) in" checklist. For now, I don't see a scenario where stocks bottom if the dollar is still in a strong uptrend. And it is... Even with a pullback the previous two days and renewed speculation over a Fed "pivot," the U.S. Dollar Index is still well above its 50-day moving average – a simple technical measure of a short-term trend – and up almost 20% for the year. Importantly, the Dollar Index is also 7% above its longer-term 200-day moving average (200-DMA)... kind of like how the S&P 500's current level is currently 10% below its 200-DMA. With stocks down today, the U.S. Dollar Index was up more than 1%. In other words, the dollar and stocks are uncorrelated. An investment in the dollar... A lot of people probably hear the "dollar" and think of "cash." I don't blame you... They are similar, but not exactly the same... When we talk about the "dollar," we're talking about it as a tradable currency – in relation to other currencies – like the U.S. Dollar Index measures. When we talk about "cash," that could be bills under your mattress, money sitting in your bank account, or fairly liquid cash-like investments like U.S. Treasurys. As we've also mentioned here over the past few months, short-term Treasurys are an attractive place to park cash. A one-year bill offers nearly a 4% return today, a dramatic move higher from 0.25% at the start of 2022 (and also uncorrelated to stocks). But while the "dollar" and "cash" are closely related and the same or similar factors are making them more valuable today, and they can do the same thing for your portfolio, don't use the words interchangeably. Sophisticated traders will trade currencies directly, but as [I wrote in the September 14 Digest]( if you want to consider adding exposure to the U.S. dollar in your own portfolio, an ETF is a much simpler option... While we don't make formal recommendations in the Digest, if you're interested in adding dollar exposure and hedging against more stock losses, one option to consider is an exchange-traded fund that tracks the dollar, such as the Invesco DB U.S. Dollar Index Bullish Fund (UUP). Risks come with trading this like any other ETF, though, and we know that currencies can be volatile, as we've seen lately. That's why "cash" is different. Now, I can't tell you how much you want to allocate to uncorrelated assets... First off, everyone's situation is different. It might be a small percentage just to get your feet wet and see the performance for yourself, or you might be comfortable with more than that. Generally speaking, at Stansberry Research, we don't recommend folks put any more than 5% into any one position of a balanced portfolio. Doing this will limit the potential damage from any single holding, especially if you use a stop-loss strategy. If you want more specific position-by-position allocation advice, I suggest your first stop be our Portfolio Solutions publications. Second, we're not discounting the fact that owning stocks is one of the best wealth-building tools ever invented over the long run. And just because most stocks have been going down all year long, there's no guarantee they will in the future. And if there happens to be a rally, the uncorrelated assets I talked about today would likely struggle. The U.S. dollar would likely drop in value relative to other world currencies... while energy stocks, while probably not falling, would likely underperform the major stock indexes. But my main point today is, there's a whole wide world beyond the most popular stocks in America or the headline indexes. And it pays to at least look at them to protect and grow your money in the long run. Listen, it's hard not to lose any money in a bear market. If you haven't yet, congratulations. But you certainly don't need to lose money or lose as much as everyone else. It's not a requirement. Cash can be your friend – and uncorrelated assets, too. Lastly, about that tool to manage your stock risk... If you are worried about stocks today, I have one more idea for you to consider... Longtime subscribers are likely already familiar with this recommendation, but it bears repeating. I'm talking about the tools developed by our affiliate partner, TradeSmith... They are designed to help you create a portfolio for any market. Specifically, the TradeSmith system can really help limit your downside risk in stocks. One of the most popular features is its proprietary "VQ" indicator. Rather than making you assign a fixed percentage to your trailing stops while determining when to sell a stock, it creates a custom amount for each stock in your portfolio – protecting your wealth while keeping you from "stopping out" prematurely on a stock that always bounces around. In fact, you can apply this indicator to thousands of stocks and even your own portfolio to see how volatile each position is. You can also use the system to gauge the health of indexes or sectors, such as energy stocks, compared with the stock market overall. Right now, one of the folks behind the TradeSmith system – and a good friend of our Steve Sjuggerud – is warning that millions of investors could be caught off guard by what's about to come next based on the alerts he's been receiving. In other words, this is another reason to consider "uncorrelated assets" today. You'll hear more about TradeSmith and from the folks behind the system in this weekend's Masters Series. But if you are interested in learning more right now, [click here for more details](. How to Ride the Bear This week's Stansberry Investor Hour features Simeon Hyman, head of investment strategy at ProShares Advisors. He shares his take on how to stay invested ride this bear market, as well as a view on some critical Federal Reserve policies that the media isn't talking about... [Click here]( to listen to this episode right now. And to catch all of the videos and podcasts from the Stansberry Research team, [visit the "media" page of StansberryResearch.com]( anytime. --------------------------------------------------------------- Recommended Links: [STOCK ALERT: This Changes Everything]( Volatility is back with a bang. And there is NOTHING normal about what we're seeing in the markets right now. Investors who understand what's happening – and know how to take advantage – could see extraordinary profits... while those who don't could end up even more blindsided in the coming weeks. [Here's how to make sure you end up on the right side](. --------------------------------------------------------------- [Huge Recession Loophole (See These Charts)]( Amid today's market turmoil, THIS is one of the biggest and most bullish opportunities today: a red-hot sector with almost unlimited pricing power and a history of outperforming in recessions. It's also the sector where Dr. David Eifrig spent half his professional life, meaning he's extremely qualified to spot world-class opportunities today. [Take a look at the evidence here](. --------------------------------------------------------------- New 52-week highs (as of 10/4/22): CTS (CTS), Revance Therapeutics (RVNC), and Texas Pacific Land (TPL). In today's mailbag, a question related to our "market breadth" discussion [in yesterday's Digest](... and more feedback on the real estate market, a topic discussed in yesterday's mail... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Where can you find the market stats on 50-day vs. 200-day moving averages for the entire market and how many stocks are trading above/below their long-term trendline?" – Paid-up subscriber P.B. Corey McLaughlin comment: Good question. There are a few places you can find this data for free. A good one we often recommend at Stansberry Research is the website [StockCharts.com](. (We have no affiliation with this site.) If you search there for "percentage of S&P 500 stocks above 200-day (or 50-day) moving average," you'll find the numbers. (For the record, as of today, the number of S&P 500 stocks trading above their 200-DMAs is still around 20%.) On our own website, you can already find moving averages and apply other technical indicators, [screens]( and [our proprietary "Stansberry Score"]( to thousands of stocks and exchange-traded funds. We don't yet have the percentage of stocks above their moving averages, but perhaps that's a tool we'll be able to add in time. "In 2007/8 RE prices were rising while rents were falling. I thought that could not last as one or the other would have to change direction ultimately. And it did, starting in 2009/10. "Today, rents are still rising or keeping steady in most markets, while housing prices are beginning to stall or fall in some markets. But interestingly, during the boom period both homes and rents rose together, at least so far..." – Paid-up subscriber Erich K. All the best, Corey McLaughlin Baltimore, Maryland October 5, 2022 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 890.6% Retirement Millionaire Doc ADP Automatic Data 10/09/08 836.5% Extreme Value Ferris MSFT Microsoft 02/10/12 764.6% Stansberry's Investment Advisory Porter HSY Hershey 12/07/07 537.4% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 494.9% Stansberry Innovations Report Wade AFG American Financial 10/12/12 415.2% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 397.3% Retirement Millionaire Doc WRB W.R. Berkley 03/16/12 381.7% Stansberry's Investment Advisory Porter TPL Texas Pacific Land Trust 11/05/20 300.5% Stansberry's Investment Advisory Porter NTLA Intellia Therapeutics 12/19/19 298.9% Stansberry Innovations Report Engel Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 5 Stansberry's Investment Advisory Porter 2 Retirement Millionaire Doc 2 Stansberry Innovations Report Engel/Wade 1 Extreme Value Ferris --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ETH/USD Ethereum 12/07/18 1,173.4% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,163.5% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,092.1% Crypto Capital Wade MATIC/USD Polygon 02/25/21 846.3% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 441.4% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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