After years of running with the bulls, is the bear market is finally coming out of hibernation
Survivalists say that if a bear attacks, play dead! Since the beginning of this year, we’ve watched the bear market poke its head up and down like a thunderous game of market “Whack-a-Mole”. Bear markets are a stressful, but natural, part of market cycles. And after 11 years, and the longest bull market in history, we seemed due for a bear.
What is a Bear Market?
A Bear Market is a period when the prices of securities are falling and there is overall sense of continued pessimism in the markets. As investors anticipate more losses, selling occurs. A downturn of 20% or more in multiple market indexes (like Down Jones and S&P 500) over a two-month period is considered the start of a bear market.
The Market since 2000
Since the beginning of this century, the market has survived several bear attacks. The first was in 2000 after the burst of the Dot Com bubble, followed by another after the 9/11 attacks in 2001, and again during the subprime mortgage crisis of 2007-2008. The last bear market occurred February 2020- March 2020 as the COVID pandemic emerged and began wreaking havoc on the economy. This period lasted a short period of time but resulted in a 31.4% contraction. 2022 has seen the return of the bear and as with any bear market, investors are on edge. With several world events converging at one time, like the Russian/Ukrainian war, continued repercussions from the COVID-19 pandemic, a slowdown in China’s economy, as well as rising interest rates and inflation, there are many legitimate reasons for investors to pull back for a while. An investor needs only to turn on the news to see that there is a lot going on in the world that would naturally stress markets.
Strategies
For a long-term investor, a true bear market can make even the savviest investor wince. The truth is that no one can predict the top or the bottom of the market. And stocks are fair-weather friends. They can perform beautifully over an extended period until one bad earnings report makes them less attractive in a blink of an eye. But what goes down does come up if the investments are good quality choices. Trends, fads, and unproven investments will always provide the greatest risk. And as always, balanced asset allocation is the key to long-term investing in any type of market.
What would Warren do?
When it comes to good quality stocks in a portfolio, if a bear attacks, he plays dead…, or he buys. There’s a reason why Warren Buffet is considered the most successful investor of the 20th century. Buffet rarely changes his long-term value investment strategy. He also views down markets as an opportunity to buy good companies at good prices. He uses these times to buy into strong companies when their share prices are depressed due to others selling. As the saying goes, one man’s trash is another man’s treasure.
Dealing with Uncertainty
When will the bear market end? That is the question every economist would love to answer. While there is no specific answer to that question, there are indicators and technical measures that provide some guidance. And the answer is…eventually! Given that financial markets lead economic cycles, the market can provide several cues as to when things may be turning more positive from an investment view. First, and most obvious, is when asset prices stop going down. Using 2008 as an example, as we emerged from the bear market, stock prices began to establish a series of higher highs and lows. Today, the Fed is actively reviewing and assessing their position to provide the smoothest possible landing during a period of dizzying economic pressures.
Investing is not a predictable science. If you have been in the market for a long time, then you know that you are always in a bull or a bear phase. Bull markets are inevitable. Bear markets are inevitable. And downturns happen with fair regularity. Use downturn periods to review your resolve and adjust your risk tolerance and asset allocation if necessary. Investing in markets should be viewed as a long-term venture. Remember, where you end up over the long term is much more important than what happens day to day.