The U.S. stock markets have enjoyed sharp gains and lower-than-average volatility since the second half of 2016. After nine straight years of rising markets, some investors may be concerned that we are heading toward a bear market.
What constitutes a bear market?
A bear market occurs when stock prices fall, which encourages investors to sell shares in order to recoup some of their losses. Unfortunately, this pessimistic outlook tends to cause a downward spiral so that prices keep falling.
What causes a bear market?
Any number of things can happen to cause a bear market. In general, some of these include:
- A slowing economy
- Investor skittishness
- A financial crisis or government intervention, like a tax rate change.
Should I be concerned about a possible bear market?
The good news is that if we are heading toward a bear market, it’s not the first one we’ve seen. According to Capital Ideas, having a long-term focus helps put bear markets into perspective:
“…Since 1949 there have been nine periods of 20%-or-greater declines in the S&P 500. And while the average 33% decline of these cycles can be painful to endure, missing out on part of the average bull market’s 268% return could be even worse. The much shorter duration of bear markets ―14 months on average ―is also a reason why trying to time investment decisions can be difficult and is usually ill-advised.”
Nonetheless, the current bull market is in its 111th month as of June 2018, which is much longer than the average bull market of 70 months. As central banks look to lift interest rates and move away from the era of easy monetary policies, we expect the market cycle to shift.
How can I prepare for a bear market?
We encourage investors to talk with their financial advisors about rebalancing their portfolios to help better prepare for changing circumstance to the U.S. and global markets.
If you have any concerns about your portfolio and how to best plan for the changing market landscape in a bear market, contact Chatterton & Associates today.
Eric Oh, CFP®, ChFC®