Bear Retreats to Cave, For Now
It seems like traders and the financial media are breathlessly eyeing a magic number for the S&P 500: 3,837.25. That’s the level below which the broad U.S. index must close to technically qualify as a bear market, or a 20 percent drop from the recent peak. On Friday, the bear came out and started roaring, but by the end of the day, he had retreated to his cave, perhaps using the weekend to rest up and come out again. (The Nasdaq Composite entered a bear market in March.)
Overall, there have been 14 bear markets since 1945 (and 3 more that were darned close to -20 percent). During those periods of loss, stocks lost an average of 36 percent over 289 days, or about 9.6 months, according to data from Hartford Funds. If that sounds awful, then here’s some better news: the average length of a bull market is 991 days or 2.7 years. By the numbers, stocks do tend to go up more than they go down, but it’s hard to remember that fact when there has been seven consecutive weeks of selling. It’s also tough to remember how good the investment climate has been over the past three and a half years, with the S&P 500 rising almost 90 percent. In fact, even amid this year’s sell-off, the S&P 500 is still up about 75 percent from its 2020 low, though you wouldn’t know that talking to investors, who are mostly bemoaning the near 14 percent shellacking that the S&P 500 has taken since April.
If you are a newbie to all of this, and research shows that a whole bunch of Americans who started investing with 2020 and 2021 stimulus checks burning in their pockets, you may be wondering if there is someone behind the curtain, who knows when markets are going to start a lengthy rise and when they are falling out of bed. Sorry to report that there is no Great Oz, either in fiction or when it comes to investing. Yes, it would be nice to know the beginning or the end of a bull and a bear market, it’s usually impossible to gauge when to get out and when to get back in. Or in traders’ parlance “nobody rings a bell at the top or at the bottom!” That’s why it’s probably best to stick to your diversified portfolio and not muck around with it too much. The Hartford analysis found that “34 percent of the market’s best days took place in the first two months of a bull market, before it was clear a bull market had begun.” In other words, if you think you can time the market, well, you can’t.
Although there is a lot of reporting (guilty as charged!) on the stock market, it’s important to remember that according to a Gallup Poll, 42 percent of Americans DO NOT own stocks or stock mutual funds, either via retirement, directly or through a mutual fund. And of Americans who do own stocks, the wealthiest 10 percent (net worth above $2 million), own nearly 90 percent of stocks and mutual funds held in the U.S. as of the Q4 of 2021, according to Fed data. While the stock market is often viewed as a leading indicator of the economy, it is not the only metric. That means that even when the S&P 500 does enter a bear market, it may not indicate that a recession is baked into the cake. Or as the legendary economist Paul Samuelson said, “The stock market has predicted nine of the last five recessions”, meaning just because the market drops, does not necessarily mean that we are going to enter a recession.
That said, recessions are normal parts of the economic cycle, we have had 13 since World War II. Sometimes the contraction and subsequent recovery last a long time (the Great Recession) and sometimes the damage is deep, but the length is short (the COVID Recession). The big problem with recessions is that they can lead to job losses, wage stagnation, and human suffering, which would leave a lot of workers in big trouble, especially as prices remain high.
If you are thinking about what to do amid the chaos of markets, try to refrain from mucking around with your investments or allocation, unless you need your money within the next 12 months. Instead, channel your energy and think about these moves that may shield you from the worst parts of an economic slowdown or recession:
Fund an emergency reserve that can cover 6-12 months of your living expenses. Keep this money in an accessible savings, checking, or money market account.
Reduce credit card or other high interest debt
Fund retirement plans to the best of your ability, especially if you are entitled to a company match.
Create a “break the glass” plan, which should be easy, especially after the pandemic.
Detail the money that you must spend for the next 3 months, which usually includes food, shelter, utilities, health insurance/medications.