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
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 patience and discipline.
You know people often say how they wish they had a time machine so they could “go back and invest in Company X?” Well, take any high-performing company you want. Early investors in that company had to show patience and discipline before they could ever reap the rewards. The good news is that we don’t need a time machine. All we need is the patience and discipline to treat your portfolio as what it is: a long-term investment in your long-term future.
Think of it like jumping on a trampoline back when you were young. Do you remember how exhilarating it felt when your feet hit the canvas? That moment when the springs would bounce you so high, it seemed like you could touch the clouds? You can think of investing like jumping on a trampoline. First, we need to let gravity do its thing.
Then we can enjoy the bounce.
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-frombear-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/howthe-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB