Here’s another update I never would have been able to send to you at my previous firm. We believe it’s important to provide you with this perspective and how we can help navigate the current market. This too, was written in collaboration with my friends at BGM, but you will recognize a far greater amount of our guidance for you more deeply intertwined. For the record, Scott, Vytas, and I truly value being in a place we can share expert advice and help you understand how it relates to the plan we’ve put in place for you.
As we discussed a couple weeks ago, after two years, the bear is back. That means it’s time to review three things every investor should know about how to take advantage—that’s right, advantage—of this bear market.
As you probably know, a bear market is a 20% drop from a recent peak. In this case, the recent peak was on January 3, when the S&P 500 closed at 4,796 points.1 By June 13, the S&P was at 3,749.1 That’s a drop of 21.8%. Bear markets can be a nerve-wracking time for investors, but in my experience, they can also be an opportunity if you know these three things about them.
1. The cause of the current bear market.
The first thing to know is why we’re in a bear market. As human beings, we fear things we don’t know, so understanding the cause of a bear market can make the situation seem less scary. That, in turn, helps us make decisions that are more rational and less emotional.
This current bear is primarily driven by two things: inflation and interest rates. As inflation has gotten continually worse over the last six months, the Federal Reserve has started raising interest rates to bring prices down. On Wednesday, June 15, the Fed announced their biggest rate hike since 1994.2
The reason the markets are down so much is because investors are afraid that the combination of high current inflation (which might squeeze profit margins) and rising rates, might push the U.S. economy into a recession. Unfortunately, no one knows for sure when a recession might occur or how bad it would be, so investors often sell their stocks and move to cash or other assets well in advance if they’re afraid a recession is in the cards. That’s essentially what a bear market is – investors making a fear-based decision based on something that might happen in the future. Which brings us to the second thing to know: What happens after a bear market. It’s called a recovery.
2. Bear markets are temporary.
No two bear markets are the same. They’re all caused by different factors. Some predate recessions and others don’t. Some can last a few months; others can last over a year. But they are all temporary.
Measured from when the S&P 500 hits a 20% decline, bear markets last an average of 95 days.3 Of course, bear markets that come with recessions typically last longer, but historically, the markets have always rebounded sooner or later. Now, as you know, past performance is no guarantee of future results. But history does often serve as a handy guide. With that in mind, here’s the recent history of how the markets have performed between 1 and 12 months after a bear market.4
Bear market start date | 1 month later | 3 months later | 6 months later | 1 year later |
October 21, 1957 | 3.4% | 5.5% | 9.7% | 31.0% |
May 27, 1962 | -2.0% | 5.9% | 11.9% | 23.1% |
August 29, 1966 | 2.4% | 7.9% | 17.6% | 24.6% |
January 29, 1970 | 4.4% | -4.5% | -8.9% | 11.8% |
November 27, 1973 | 2.1% | 0.7% | -7.4% | -26.9% |
February 22, 1982 | 1.1% | 3.0% | 1.3% | 30.4% |
October 19, 1987 | 6.8% | 10.9% | 14.7% | 23.2% |
March 12, 2001 | 0.3% | 6.4% | -7.4% | -1.2% |
July 10, 2002 | -1.3% | -12.7% | 0.8% | 7.4% |
July 9, 2008 | 4.1% | -26.9% | -28.5% | -29.1% |
February 23, 2009 | 10.7% | 19.3% | 38.0% | 47.3% |
March 12, 2020 | 12.5% | 22.6% | 34.7% | 59.0% |
Again, there’s no way to know what the immediate future holds for this current bear market. What we do know, however, is that the recovery can be one of the most fruitful time periods for investors – because you’re essentially getting in on the ground floor of the next bull market. As you can see, one year after a bear, the markets often will have recovered what they lost and sometimes gone on to new heights! But there’s only one way to take advantage of these types of potential gains:
3. The key to turning a bear market to your advantage is to first do no harm.
One of the primary objectives of the Harvesting strategy is to keep you from liquidating quality investments at inopportune times. Our bear market play book involves several components…
First, we review your plan together to get a sense for the spending that is needed and what can be deferred. Next, we make sure that you have sufficient cash flow and reserves to help meet those essential needs, without selling any risk assets (or at least as few as possible). If you have high-quality and well-diversified stocks that pay a good dividend, then you can feel free to spend that dividend. This strategy helps you to be responsibly patient.
Let’s discuss before you sell any stocks—either individually or as a sector.
Our role in markets like this is to review your holdings for companies whose dividends may be in peril. We also to look for buy opportunities with companies whose prices have made them attractive enough to meet our screens. Remember, the lesson from these past markets is they don’t stay down forever, and the bounce back is something we don’t want to miss.
Bear markets can also be a compelling time to revisit concentrated stock strategies as taxes on diversification may be less when assets being sold are down. We feel better about such a move when the new investments we are looking to diversify into are down a similar amount.
Before you sell any holding or attempt to address a need for liquidity, call us to discuss. Even if you are not yet certain whether you are transitioning to a new advisor, or remaining with us at our new home, you are important to us. We take our responsibility to you, and the plan we put in place for you, very seriously.
If you have funds set aside for eventual deployment, we should discuss the best methodology and types of investments for averaging in as well.
If history is a guide, this bear will pass. It will do less harm—and maybe some long term good—if we follow our strategy to understand the cause, maintain perspective, and map a plan for action…and in some cases, deliberate inaction.
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1 “S&P 500 Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices
2 “Fed rolls out biggest rate hike since 1994,” Reuters, https://www.reuters.com/markets/us/fed-seen-revving-up-inflation-fight-with-sharp-rate-hike-2022-06-15/
3 “Here’s How Long It Takes For Stocks to Recover From Bear Markets,” Forbes, https://www.forbes.com/sites/sergeiklebnikov/2022/05/23/heres-how-long-it-takes-for-stocks-to-recover-from-bear-markets/?sh=655019002565
4 “How the S&P 500 Performs After Closing in a Bear Market,” The Wall Street Journal, https://www.wsj.com/livecoverage/stock-market-today-dow-jones-bitcoin-fed-rates-06-14-2022/card/how-the-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB
Material provided by Dean Packard and written by Bill Good Marketing, a non-affiliate of Cetera Advisor Networks LLC.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.