Greetings!
Three Things to Know About Bear Markets
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
