Bear Markets

When you compare your 401k balance to three weeks ago it hurts. I know. The record long bull market ended on March 11, and we officially entered bear market territory. A bear market is defined as a 20% decline from peak stock prices. After 11 years of rising US stock prices (the S&P 500 up 521%), stock values were expensive. Last year the S&P 500 was up 30%. We were due for a pullback. Add the coronavirus and geopolitical turmoil in the oil market, and a stock sell-off turned into a panic.

Bear markets are an unpleasant experience. They’ve happened before. They’ll happen again.

Bear Market Facts: A 20% decline from the peak; 25 Bear Markets since 1928; average declines of 30%

What to do Now for Your Financial Future

Sell and quit saving? Or keep calm and stay with the saving and investment discipline? The future is, and always has been, uncertain. Let’s add some historical perspective so you can make a more informed decision against the uncertain future we all face today.

It’s Happened Before

First, some more context. Since 1928, there have been 25 bear markets. The average time it has taken prices to decline 20% from the peak was 255 days. We got there this time in 17 days. Since WWII, the average length of bear markets was 13 months with average declines of 30%. As of yesterday’s close (3/16) the S&P 500 was down about 30% from February 19th highs. Why was this decline so much quicker? Good question for which there aren’t precise answers. Perhaps it’s simply that information (and disinformation) flow much faster than ever before.

The market has seen flu pandemics (1918-19 Spanish Flu as well as in 1957-58 and 1968-69), and various epidemics (see Exhibit 1). In the 20th century markets faced two World Wars, numerous regional and political upheavals, terrorist attacks, a Great Depression, a Great Recession, and seventeen recessions. Second, let’s remember that the money you save and invest in the stock market buys ownership of corporate dividends and profits. It’s not just a number on your statement. Your dollars are invested in US and international businesses. Businesses like yours. Human thought, care, and innovation hard at work. Human beings striving to make a living, move the world forward, and to earn profits that keep the business running.

The Market Emotions: Fear and Greed

The stock market isn’t the economy. The two are connected through corporate profits, yet markets can deviate radically from economic reality because markets are often driven by human emotions. Emotions that often lead to speculative buying or frantic selling. We can’t know what the ultimate economic fallout will be from coronavirus. It’s often said the market has forecasted seven of the last four recessions! In all likelihood, the US is now in recession. As the data above suggests, recessions are not the end of the world and usually represent the best buying opportunities. Especially if you have a long-time horizon.

History Lessons

Stock market returns aren’t guaranteed. Yet the long-term upward trend (see Exhibit 2) of investing in human progress through the stock market has provided millions of people compound wealth accumulation they couldn’t have otherwise achieved. That same upward trend tells us selling into panics is a tried and true path to permanent losses.

Time in the market presents much better odds for investment success than timing the market.

Three Things to Remember

• Know your time horizon (when will you need the money);
• Understand your investment mix (what’s the potential upside vs. downside);
• Stock investment is a long-term discipline.

If you’re closer to retirement, take a good look at all of your accounts, your assets, and your debts.

 

Exhibit 1

 

 

Exhibit 2

 

Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com or 949-273-4200.

 

PLEASE NOTE: Nothing herein constitutes investment, legal, or tax advice. For details please see Disclosure.