From The desk of Margaret Sucré-Vail
March 12,2020
  • The Dow Jones Industrial Average crossed the 20% decline level that technically marks a bear market.
  • It’s important to remember that these market gyrations, while painful, are to be expected.
  • At SEI, we take the possibility of market downturns into account when constructing long-term portfolios.

The Dow Jones Industrial Average crossed into bear market territory on March 11—defined as a decline of at least 20% from its recent peak. Many airline companies and energy stocks surpassed this threshold with even steeper drops, as equity prices were burned by accelerating uncertainty about the coronavirus and the outbreak of an oil-price war between Saudi Arabia and Russia. For long-term investors, we don’t see these events as a reason to change long-term portfolio allocations. In our view, while losses may be significant, neither the virus nor declining oil prices represent typical catalysts for a recession. On the contrary, lower oil prices also have the silver-lining effect of reducing energy expenses for business and consumers; and as the virus’ impact on markets fades, so too should its bearing on the U.S. economy. Also, it is important to remember that declines of this nature are to be expected. At SEI, we take the possibility of market downturns into account when constructing our long-term portfolios—meaning that losses as a result of occasional market downturns are factored in to longterm return assumptions

Bear market perspective

Stocks generally do not make gradual moves during bear markets. Instead, they tend to spike higher and lower from day to day. Nowhere are those spikes more dramatic than when the market hits a bottom. Over the last 50 years, the Dow Jones Industrial Average has experienced seven major bear market cycles—price declines of 20% or greater. On average, these bear market cycles lasted about 20 months, lost a cumulative 37%, and took 57 months to fully recover.

Exhibit 1: Seven Previous Bears












Source: Bloomberg, SEI Dow Jones Industrial Average data as of 3/10/2020

Equity bears bring out bond bulls

The U.S. Federal Reserve recently made its largest emergency cut to short-term interest rates since the financial crisis of 2008 to 2009. The recent move was an attempt to curb the potential economic fallout from the coronavirus. The yield on the 10-year U.S. Treasury is at an all-time low. After closing 2019 at 1.92%, the yield on the 10-year US Treasury plunged below 0.50% on March 9, according to the U.S. Treasury Department (yields and prices move inversely). Although low yields are unattractive from an incomegeneration perspective, bonds do not merely serve as a source of income in a portfolio. They also may help offset stock market losses in times of turmoil for equities.

Stay calm and stay invested!

Now is not the time to panic. If you’re thinking about selling equities to avoid losses, it’s probably already too late. If you do sell now, you’ll eventually be faced with deciding when to buy back into equities. Our research shows that timing the decision to get back in is just as difficult as timing the decision to get out, and investors are notoriously bad at market timing. 

Index Definitions The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and NASDAQ. Important Information This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only. Index returns are for illustrative purposes only and do not represent actual investment performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Investing involves risk including possible loss of principal. Diversification may not protect against market risk. Information provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI). 

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Sincerely,
Margaret Sucré-Vail
AIF ® AWMA ®
Here is my article recently published in Forbes - Managing the Human Side of Wealth
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