BEWARE: Bear Market Territory

What can be expected with the markets closing on a bear market and how you can weather the storm.

Intro

A bear market – what is it? Contrary to popular belief, it’s not a market to buy bear pelt, but instead a term indicative of investor pessimism that results in large sell-offs. Specifically, a bear market occurs when the market drops 20% or more than its most recent peak and it signifies an inflection point where a period of growth becomes a period of contraction. What we are seeing today is seemingly a ‘perfect storm’ of consequential events – the Ukraine/Russia war choking the global oil and gas supply, China’s lockdown protocols curbing the already depleted supply-chain, and some of the highest inflation rates in recent history. On their own, each of these events have dire effects on the world economy, but together they have led to the economic contraction that we are experiencing.

The situation

As the year goes on, the Fed will continue on its rate-raising campaign. Typically, rising rates and large sell-offs curb investment because of market volatility, but this sell-off hasn’t resulted in typical investor behavior. Bank of America released data that almost 63% of private portfolios are invested in stocks. To put it in perspective, only 39% of portfolios were invested into stocks in 2008. This goes to show that investors are still unwilling to sell and are waiting for their ROI. Rather than focusing on the recession, analysts are mapping out when investors will likely see the bear market bottom out using historical data. According to Shawn Snyder, Head of Investment Strategy at Citi Personal Wealth Management, “On average, the market takes 132 trading days to go from a high to the start of a bear market, and 213 trading days to hit the low, according to Dow Jones Market Data.” While we still have many more months to go, we can expect things to get better when the Feds hit pause on raising rates.

Is this cause for panic? Economically, the answer is no. There can be no periods of economic growth without periods of downturn. In the economic balance of things what goes up must come down and vice-versa. In a Forbes article, LPL Financial Chief Market Officer, Ryan Detrick noted that "There have been a lot of bear markets over time, but one thing that has always happened is stocks have eventually come back to new highs." Though we are nearing a bear market we can rest assured that the bottom trough will be hit and economic prosperity will come back.

Conclusion

As investors, it’s best to keep in mind your financial plan. In times of downturn, a panic settles in on investors causing them to pull their money out of the market. As an advisor, it is important to ask your clients what it would take for them to get back into the market – what is the market signal that will ring the bell saying the downturn is over? Often there is no such signal, and the best way to weather the storm is to wait it out. Even with this strategy, it is paramount that advisors show their diligence as weathering the storm to millennial clients may come off as a method of inaction. When assets are lowering in value, there may be an opportunity to optimize liabilities. With debt optimization, advisors can expect to address a more full financial picture, while deepening their client relationships.