I know how painful it is to see/watch the prices of your investments fall day after day to start 2022. As an advisor, we always prepare ourselves for times like these, but it is never easy. My days are filled with webinars and conference calls from the brightest minds in financial services, while my nights are filled with research and reading. While all is a useful exercise to gaining understanding on WHY this is happening, there are seldom answers on how to correct it.
During times like these, as financial professionals, we trust in history to show us how to act/react to bad markets. Typically, when the market goes backwards, analysts are measuring from peak to trough aka the recent high of the market to how far it goes down and that will put it into one of three categories:
- A PULLBACK: defined as 5%-10%, usually occur 3-5 times a year.
- A CORRECTION: defined as 10% -20%, usually occurs once every 12 months.
- A BEAR MARKET: defined as +20%, usually occurs once every 3.6 years
As of today, we are sitting in correction territory, looking for signs that the worst is over. No one is ready to say we have hit bottom while we there is a Fed meeting tomorrow with major decisions still ahead that could easily push us into a bear market (inflation, interest rate hikes and balance sheet reduction).
With that being said, the economists that I follow/communicate with continue harping that this is the enhanced volatility that they expected in the first half of the year. For all the reasons mentioned above, the market is going to be up and down more this year than last, but they are still confident the second half will be strong and finish the year positive. The silver lining in these predictions are they are just that… predictions with many variables attached to them that could change the narrative. So, in an effort to ‘plan for the worst and hope for the best’, I wanted to just highlight some quick facts about bear markets that I find comforting.
Bear markets tend to be short-lived. The average length of a bear market is 289 days, or about 9.6 months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.
The last Bear market lasted 33 days: From 2/19/2020 – 3/23/2020, the market sold off -33.92% (COVID-19 pandemic)
Bear markets are normal. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets—and stocks have risen significantly over the long term.
Stocks lose 36% on average in a bear market. By contrast, stocks gain 114% on average during a bull market
Half (50%) of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market.In addition, 34% 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.
To conclude, the biggest mistake a long-term investor can make during a correction is to focus on minimizing price drops and moving to cash. The best days in the market occur during a bear market and before anyone realizes we are in a bull market.