The big question is are you acting as a Bull or a Bear in our current market economy? It seems the bull market is still leaning really hard toward pessimism. True, we have so much going on. The exceptionally long laundry list includes an aggressive Federal Reserve with (not a perfect) track record of navigating soft landings, stagflation, ongoing China lockdowns, new global COVID concerns, supply chain issues, the ongoing Russia-Ukraine war and failing volatile crypto firms. In addition, to all that, a 34% percent increase in energy prices and a 10% percent rise in food prices, making this the highest rate of increase since December 1981.
A bear market is defined as a prolonged period in which investment prices fall, usually by 20% or more, accompanied by widespread pessimism. Bear markets usually occur when the economy is in or remarkably close to a recession, unemployment is high and/or when inflation is rising quickly (and here we are).
During previous bear markets, on average, the market declined substantially as the economy contracted. Historically stocks have bounced back strongly from big 2-quarter drops as we just experienced. In fact, after a more than 20% drop over two consecutive quarters (the S&P 500 Index fell more than 20% in the first half of 2022), the average performance over the following year has been up 31%.
While of course no one has the perfect crystal ball to perfectly predict exactly if that historical pattern will repeat, it certainly helps reassure those who have stuck with this unattractive market that better days for stocks may be ahead. The next round of inflation data, the start of a much-anticipated third quarter earnings season and what we hear from the Feds along the way with the Fall elections will go a long way towards deciding whether we are actually witnessing the proposed pattern of stock market gains. Shallow bear markets like we have so far tend to bottom in about 7 months on average. Month seven is July.
There is no doubt that stocks have been really knocked around in the first half of 2022, and that bear market pessimism is extremely popular. But time in the markets, not timing the markets, is still the wise way to go.
It is normal to be concerned with investment portfolio performance during these declining markets. Fears of further declines and market volatility often lead investors to making the wrong decisions, at the wrong time, for the wrong reasons. This can result in many investors pulling money out of the stock market after absorbing much of the decline. No one can time the market perfectly. If investors retreat and get out of the market, then when do they try and time perfectly getting back in? That is when they risk missing the subsequent rebound after a bear market, which historically has been very robust.
As I have shared with my personal clients back in December 2021, put your seatbelt on. Tighten it up a bit more. It is still expected to be a bumpy ride. This is when you should be talking with your financial adviser. Review your time horizon, have emergency money on the sidelines, talk about tax efficient strategies and always lead with your financial plan. Everyone is different and it is not a one shoe fits all mentality. Make sure your personalized long-term financial plan is adapting for your unique life situations and whatever gets in your way. Including this market volitivity.
A few things to remember:
Equities typically deliver strongest returns when investors are most pessimistic. Many investors seem to be pessimistic right now. Returns following pullbacks have rewarded investors. Markets turn before the economy. Historically it has paid to own stocks, before, during and after recessions. Be an investor with your serious long-term money and not a day trader.
Emmy nominated journalist, Jennifer Rogers Markwell, changed gears in her television career when she realized the need to help women and their finances. It started at home for Jennifer after her grandfather passed away and she wanted to help her grandmother make sense of investing. Now she regularly hosts educational workshops to empower women (and everyone) to take charge of their investments. She is founder and president of Platinum Wealth Management.
Disclosures: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.