With news easily accessible through phones, social media, television, podcasts, and other means, I’m sure most of you have heard that we have entered a bear market. What does this mean, and is there anything we can do about it?
What Is a Bear Market and How Often Do They Occur?
A bear market is commonly defined as a 20% or more drop from a recent peak. The S&P 500 recently hit this point.
According to a piece from the Hartford Funds titled, "10 Things You Should Know About Bear Markets" (bear/bull market data as of 12/15/2021), we see that “there have been 26 bear markets in the S&P 500 Index since 1928.” But an interesting note from the article shows that “between 1928 and 1945 there were 12 bear markets, or one about every 1.4 years. Since 1945, there have been 14—one about every 5.4 years."
Why Is It Called a Bear Market?
I grew up vacationing in Montana every summer. The idea of seeing a bear out in the wild was (and still is) mesmerizing to me. So, as I grew older and learned that a bear market has a negative connotation, I was confused. I love bears! How could they not be associated with positive things?!
Despite my love of bears, they are associated with down markets. Why is it that we call negative markets “bear markets” and positive markets “bull markets”? According to Investopedia, “The actual origins of these expressions are unclear, but one reason could be that bulls attack by thrusting their horns upward, while bears attack by swiping their paws downward.”
What Should We Do (or Not Do)?
We acknowledge that things haven’t been great this year. During times like these, many people feel the need to act in some way. But sometimes our need to “do something” can lead to regrettable decisions.
Here are a few important things we believe in that may be especially relevant right now:
Be careful that your decisions aren’t based strictly on emotions that are triggered by negative economic trends and recent market declines. We don’t want to sell our investments out of panic or heightened emotions; if anything, now may be a good time to buy more for those who can. People often hear the phrase “buy low, sell high.” Unfortunately, people tend to feel like doing the opposite – proceeding to panic and sell AFTER markets have already fallen (selling low). Then when things are rosy and rising in the markets and FOMO (fear of missing out) takes hold, loads of people tend to want to jump in (buying high). Bear markets give us an opportunity to buy low, or at least to buy much lower than the most recent peak. After all, Warren Buffett has said to try to be “fearful when others are greedy, and greedy when others are fearful." I know it is difficult to go against the prevailing sentiment of the day, so it is kind of like taking a leap of faith. Is it possible you put money in the markets and they go down even further? Of course. But prices now are cheaper than they were at the start of the year. Who doesn’t like buying at a discount?
If you have the ability and a long time horizon, buying more now could be a really good action to take, whether it’s continuing your periodic investment plan or adding in a larger lump sum.
Some investors may feel like selling their investments now and then “waiting it out” until things feel better with the economy. This is dangerous because you do NOT want to miss the rebound. We aren’t sure when it will be, but by the time you feel comfortable about things, the market will likely already have risen, and maybe even dramatically. The stock market can be very forward-looking. A piece from Capital Group called, "Keys To Prevailing Through Stock Market Declines" (data as of 12/31/2021) tells us that “every S&P 500 downturn of about 15% or more since the 1930s has been followed by a recovery. Recoveries have been strong. Returns in the first year after the five biggest market declines since 1929 ranged from 36.16% to 137.60% and averaged 70.95%. Over a longer-term, the average value of investment more than doubled over the five years after each market low.”
I don’t think many people felt good about the economy and markets on March 23, 2020. There was no resolution to Covid, uncertainty was widespread, and pessimism gripped the world. Yet that was the “bottom” of the market during the Covid crisis, and markets proceeded to rebound rapidly and enormously.
As you review your statements, you may note recent losses. But remember, even though your statements may be down right now, those losses are only on paper - they’re not realized unless you sell!
Others, like many retirees, may not have new money or income from working to enable them to buy more right now, and they may be taking distributions from their investments to give them income. We still don’t want to sell out of panic. We want to stick to our plans. It’s important for you to focus on your individual situation and what you can control. Another thing to remember is that returns in the equity markets have been outstanding for over a decade before this year, and so this is an expected bump in the road. Diversification, rebalancing, and careful monitoring of where we take withdrawals are important things we seek to do for you.
Regardless of the stage you’re in, whether you’re working or retired or anywhere in between, we are happy to review your individual situation with you. We know this isn’t an easy time for anyone, and we want to listen to your concerns and try to address them.
Although bear markets aren’t fun and exciting, they can provide good opportunities for investors to add more to their long-term investments. Bear markets are part of the journey of investing, as well as good times to help investors learn how to be patient and stay the course. If markets only went up all the time, it would be too easy. We will get through this!
Christian Covey, Chief Investment Officer
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The opinions expressed in this material do not necessarily reflect the views of LPL Financial.