7 Things You Should Know About A Bear Market
There is no denying that things are challenging at the moment. Inflation is on the rise, interest rates are increasing and the housing market has taken a turn. We are officially in a bear market which occurs when a market experiences prolonged price declines. Factors such as a weak or slowing economy or shocks like pandemics or war can all contribute to a bear market.
The reality is that bear markets are relatively common in the history of the U.S. stock market, often accompanying U.S. economic recessions. Although bear markets can feel scary for investors who are watching their portfolios seemingly evaporate on a daily basis, there’s no reason for panic for long-term investors with diversified portfolios, who have the discipline to weather the storm.
Here Are 7 Things You Should Know About a Bear Market:
You Have an Opportunity to Buy
When stock market prices decline and a bear market occurs, it provides investors with the ideal opportunity to buy. This is assuming that the market will recover which is highly possible but it does provide opportunities to purchase some of the best stocks in the market at a good price with the hope that they will deliver excellent returns in the long term.
People are encouraged to purchase individual stocks because it makes it possible to diversify and balance out risk. So, if you are thinking about how much you want to invest in stocks, think about how you would feel when markets turn downward and how you would feel should you miss out when markets improve.
You can take advantage of compounding when you think ahead in terms of decades as an investor. Over time, gains will soon mount up and that’s the reason why the general stock market return is around 10% each year. It’s not common for markets to return 10% in one year but in the long term investors are then rewarded with a higher longer-term average which is impressive. However, there is no denying that it is challenging to ride it out because you have to face the difficult times when you see the market continue to drop.
Bear Markets Don’t Last too Long
If we look back, historically, bear markets have not lasted too long. Since 1950, the average bear market has lasted just 11 months and given that a bear market begins at the peak of the last bull market, it means that the current bear market has lasted for around five months. What this means is that the current bear market could be beyond the worst of it.
Average Decline In A Bear Market: 29.8%
When a bear market arrives, you can feel as though you are losing everything and that your portfolio will be worth nothing but that is not the case. In fact, since 1950, the average decline in a bear market is 29.8%. When we look at the current situation on the basis of historical averages, it could leave investors feeling reassured. As it currently looks, it could mean that the current bear market has declined by 13.5% and so, this could mean that some buyers might consider it an opportunity to buy.
Bear Markets and Recessions
Bear markets are looked at in two different ways. There are those that are associated with economic recessions and those that are not. Since the 1950s, there have been eight bear markets that have not been associated with a recession and this saw a decline from peak to trough of around 23.8%. Of course, the past is not a reflection of the future, but even if a recession came our way, history has proved us time and time again that the market will always recover from it.
Healthy Market Cycles Include Bear Markets
Bear markets might be alarming for investors but stock markets do follow cycles. A decline in the economy is not always a bad thing and both bear and bull markets have been seen regularly through history.
Stocks are subject to a phenomenon known as the investor sentiment cycle. Since 1975, the rolling annual 30-year return of the S&P 500 has always stayed between around 8% and 13.6%. That return has been remarkably consistent over the long term. However, as most investors have experienced, there have been plenty of wild swings in the S&P 500 over one- or two-year periods.
“Be fearful when others are greedy and greedy when others are fearful,” investing guru Warren Buffett once famously said. During bear market cycles, it’s natural to feel fearful, desperate and pessimistic. The difficult part about navigating a bear market is that the best thing to do historically during these troughs in the investor sentiment cycle is to buy stocks, not sell.
Be Cautious of the Bear Market Rally
Investors might think that buying at the dip during a bear market and then holding for the long-term but those looking for short-term returns should be aware of the bear market rally. This is where stock prices rally quickly within a bear market but investors should recognise that these rallies are short-lived and so, they should be able to look beyond them.
Stocks Rebound Before the Economy
Stocks will recover before the economy and so, they are useful when it comes to understanding the economic outlook. As a result, stock prices will be determined by market expectations in relation to economic data that is linked with interest rates and inflation.
Inflation is the No. 1 enemy for the Federal Reserve at this point, and interest rates are likely still headed significantly higher from current levels. However, investors shouldn’t wait for the economy to improve to start buying stocks. The stock market is a leading market indicator because stock prices reflect aggregate expectations for the future rather than current economic conditions. It may take a long time for the Fed to get inflation under control and back in line with its 2% target, but the S&P 500 will likely begin to rebound as soon as investors start to see light at the end of the inflation tunnel.
Do You Have A Plan?
There is no denying that these can be stressful times and it is now, more important than ever, to focus on your long-term goals instead of chasing short-term gains because they are hard to come by. If you have defined goals then a long-term plan is always going to give you a greater chance of meeting them.
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