Forex Focus: Hedging Against A Bear Market by Matthew Caruso
Ever considered foreign currencies during a bear market?
Here’s why you should.
It has been more than five years since the last bear
market in US equities ended. The recent explosion in volatility in the markets and the 507-point, or 4.19%, oneweek
fall in the Dow Jones Industrial Average (DJIA) during
the week of January 18, 2008, has led to many inquiries about
the best way to hedge against a bear market in US equities.
Buying gold is often said to be the simple solution to
hedging against a falling stock market, but gold fell $16, or
1.8%, during January’s largest weekly decline. Anyone seeking
shelter in gold was shocked with a loss rather than a profit
to offset the weak stock market performance. Perhaps the
market wisdom of hedging a falling stock market by buying
gold may not be true. A good starting point in seeking the best
stock market hedge would be to examine which markets
would have produced a profitable alternative to equities
during the stock market’s large weekly decline.
Alternative markets related to the equity markets include
foreign currencies, bonds, and precious metals. They will be
examined in order to see if any of these provided a good
hedge in January’s largest weekly decline as well as in past bear
markets. In addition, sectors within the market such as consumer
staple stocks and utilities are often cited as a way to sit out market
corrections due to their position in the economy and their typical
status of being large dividend payers. Therefore, stocks from
these sectors will also be studied in detail.