Equity markets have seen record declines in recent weeks interspersed with the odd close to record daily gain. We have seen the fastest bull to bear turn around in history and it is widely accepted that we are approaching a recession.
So how low can we go? The answer that most people come up with is based on what has happened before. We have seen aggressive pull backs previously in 1929, 1987, 2008 to name a few. In fact, according to the below article:
‘From 1900–2014, there were 32 bear markets. Statistically, they occur about once every 3.5 years and last an average of 367 days.’
That is probably more common than a lot of people think. Indeed, the last 10 years plus has lead us all to feel as though equity markets simply slowly trundle upwards. Most of us have already forgotten about the 19% pullback in Q4 2018 due to it being followed by one of the best years for equity markets in years.
‘For investors who sold at the bottom of these markets, these downtimes had a detrimental effect. Investors who maintained a diversified portfolio and stayed invested so they experienced the subsequent recovery were not harmed. Remaining focused on the long-term is an important thing to do when in the middle of a bear market.’
The below article then goes on to also expand upon bull markets – it is important to remember that these also happen. Right now all everybody can think of is Coronavirus and the upcoming recession, however,
‘Bull markets often follow bear markets. There have been 14 bull markets—defined as an increase of 20% or more in stock prices—since 1930. While bull markets often lasted for multi-year periods, a significant portion of the gains typically accrues during the early months of a rally.’
In a recent article entitled ‘6 tips to navigate volatile markets’ we looked at how missing the best days in the market can severely impact returns over the medium-long term and the simple reality is that there is too much data supporting this stance to deny it.
So what is my job in times like this? How low can we go? Should we have an all seeing eye and be able to predict these things? Goldman Sachs are telling us that we could see the S&P 500 fall to 2,000 and that it will then recover to around 3,000 before the end of the year… are they correct? Does it actually matter whether they are correct if you have a well diversified portfolio that is designed in line with your investment horizon? It would have been great to have sold out 6 weeks ago and now be sitting on a pile of cash. But when would you buy back in? Now? Tomorrow? Next week? You would need to time that right too (ie you would have had to get lucky twice).
The only thing that you can do is remember the basics. Remember the data. Markets are volatile and that is to be expected. It is arguably a little unfortunate to have seen a near bear market in Q4 2018 (it didn’t quite make 20% but wasn’t far off) and then a subsequent one now. Certainly, if you started your investment journey in summer 2018 then it must all be feeling like a waste of time at the moment and a rather uncomfortable ride. For those in that position, I would encourage you to remember the long term and the reason why you invested in the first place which is something that the chart below from Vanguard and the below article perfectly highlight:
U.S. Stock Bear Markets and Their Subsequent Recoveries
By Dana Anspach – Certified Financial Planner.
Bear markets are defined as periods when the stock market declines by 20% or more from the highest point to its subsequent lowest point. From 1900–2014, there were 32 bear markets. Statistically, they occur about once every 3.5 years and last an average of 367 days.
Despite the occurrences of bear markets, markets typically have been up more than they have been down throughout history. From 1950 through 2018, for example, the S&P 500 was up on 53.7% of days and down 46.3% of days, and the number of up days exceeded the number of down days in every decade.
Historical Market Tumbles
In the 1970s, the market dropped 48% over 19 months, and in the 1930s it dropped 86% over 39 months. The most recent U.S. bear market occurred in 2007-2009 when the stock market dropped 57% over 17 months. Another notable bear market is Japan’s “Lost Two Decades” from 1998 to present when market values declined 80%.
For investors who sold at the bottom of these markets, these downtimes had a detrimental effect. Investors who maintained a diversified portfolio and stayed invested so they experienced the subsequent recovery were not harmed. Remaining focused on the long-term is an important thing to do when in the middle of a bear market.
Recovering From a Bear Market
Bull markets often follow bear markets. There have been 14 bull markets—defined as an increase of 20% or more in stock prices—since 1930. While bull markets often lasted for multi-year periods, a significant portion of the gains typically accrues during the early months of a rally.
From 1934–2014, the S&P 500 suffered total return losses of at least 20% in four different calendar years, the most recent being 2008’s 37% decline. In the year after the three previous 20%+ tumbles, the index gained an average of 32%. You have to be willing to stay invested in the market during the downtimes to participate in the recovery.
For example, after the S&P 500 bottomed at 777 on Oct. 9, 2002, following a 2 ½-year bear market, the stock index then gained 15.2% over the following month. Investors who flee to cash during bear markets should keep in mind the potential cost of missing the early stages of a market recovery, which historically have provided the largest percentage of returns per time invested.
In 2008, the S&P 500 bottomed at 683 on March 9, 2009, after declining by nearly 40%. From there it began a remarkable ascent, climbing more than 100% in the following 48 months. Investors who are prone to move entirely out of stocks during bear market declines might want to re-consider such action, as attempting to properly time the beginning of a new bull market can be challenging.
Investing During a Bear Market
If you have cash, considering buying opportunities during a bear market. Historically, the S&P 500 Price to Earnings Ratio (P/E) has been notably lower during bear markets. When investors are more confident, the P/E ratio typically increases, making stock valuations higher. Professional investors love bear markets because stock prices are considered to be “on sale.”
As a rule of thumb, set your investment mixture according to your risk tolerance and re-balance in order to buy low and sell high. Never cut contributions to retirement accounts during down markets. In the long run, you will benefit from buying new shares at lower prices and will achieve a lower net average purchase price.
If you’re in retirement, only the portion of your money that you won’t need for another five to 10 years should be in stocks. This process of allocating money according to when you’ll need it is called time segmentation. You want a retirement plan that allows you to relax and not have to be concerned about the daily, monthly, or even yearly market gyrations.
