Are We Heading Into A Bear Market?

Assessing the current market headwinds and what to do about it.

ChatGPT4o put “Bock Market” into this image. When I asked it to remove that, it added “REMOVE” to the image. Still working out the kinks at Open AI, apparently.

Taking A Step Back

After last week’s ugly price action, I thought it might make sense to take a step back and assess where we are now in terms of the market and the economy, and what we should do about it. Let’s first consider the headwinds we’re facing this year.

Current Market Headwinds

• Recession. Goldman Sachs has raised its odds that we’ll have a recession this year to 35%, but I would be surprised if we don’t have at least one quarter of contraction. Given the extent to which government spending has fueled economic growth in recent years, the Trump-Musk plan to cut the federal deficit in half from $2 trillion to $1 trillion will almost certainly lead to an economic contraction in the short term.

  

• Negative Wealth Effect. Since America’s top earners are responsible for nearly half of all consumer spending—and those top earners have the largest stock holdings as well—a market correction can make them feel poorer, and spend less. And that of course would have a reflexively negative effect on the real economy.

  

• Tariffs. Trump’s new tariffs are scheduled to take effect this week. One would think that’s already largely priced in to stocks, but who knows.

• DeepSeek. After news of China’s AI competitor broke earlier this year, we placed bearish bets on Nvidia (NVDA 0.00%↑), one of which is still open. Since DeepSeek showed that more efficient software could obviate the need for a lot of expensive hardware, that’s been a headwind for big tech capex.

• Ad Spending Decline. It’s worth remembering that some of our biggest tech companies such as Alphabet (Google) ( GOOG 0.00%↑ ) and Meta ( META 0.00%↑ ) are essentially advertising companies, and in an economic contraction, ad spending is going to contract too. So attractive trailing valuations here may be deceptive.

• Competition from China. A lot of Americans may be unaware of the extent to which Chinese manufacturing has climbed the value chain. If so, videos like the one below may be worth a watch. Trump’s tariffs will protect American manufacturers from Chinese competition in our domestic market, but not in international markets (I think Trump ought to allow Chinese EV makers to sell a small number of cars here without tariffs, to prompt American companies to elevate their games).

• Geopolitical uncertainty. Talk of bombing Iran, etc. No elaboration needed here.

What To Do About It

Last week, we placed a number of short-term bullish trades. Most of those were predicated on us getting at least a market bounce in the near term. If that happens this week—we get a relief rally after the tariff an economic indicator news comes in better than expected—than we’ll make some money on those trades; if not, we won’t.

At this point, I should note that I happen to have a large percentage of my portfolio in cash—partly, because I place a lot of options trades, where I use small dollar amounts, because of the inherent leverage. But also because I got a cash settlement this year related to a nano cap stock I bought years ago (I bought thousands of shares at an average price of under a dollar during the financial crisis; then the company took it private a couple of years ago at $2-something per share; then a hedge fund investor sued to get the buyout price raised by $1.50 or something, and I got the difference about a month ago). So I may be a bit more sanguine about buying lotto tickets now than you. So let’s talk about what you should consider doing here.

• Raise cash or hedge. Given market uncertainty, you should have a significant cash position, or hedge. To be hedged is essentially to have synthetic cash, because when the market tanks, the cash value of your hedge will go up. As a reminder, You can download the Portfolio Armor optimal hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you're reading this on your phone). Our app can help you find the least expensive hedges given your risk tolerance and time frame.

  

• Look for opportunities overseas. We’ve been doing that with China in particular. Partly because there are some attractive stocks there, but also because the Chinese stock market is on the whole undervalued relative to the enormous size of its economy.

• Look for buying opportunities in special stocks. By “special” I mean ones that are likely to be market leaders for years, because of their moats. We’ve done this recently as well.

• Add short exposure. We did that with Nvidia earlier this year, but I’ve been hesitant to short into a declining market, in the event we’re headed for a bounce. I’m probably going to add some short positions this week, whether we get a bounce nor not. Even if the bull market returns soon, we are probably going to see a rotation in leading names, so we may still be able to make money on the short side if we pick the right targets.