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What Investors Can Do in A Bear Market

Inflation is still an issue for the U.S. economy, which the Fed is trying to combat by again raising interest rates - with the most recent increase happening in July 2022 by 0.75 percentage points. The question many are asking is whether we’re in a recession. The technical definition of a recession is two consecutive quarters of negative GDP. However, the U.S. labor market is overly tight and consumers are still spending, which is unusual to see in a recession. As of now, what is certain is that we are in a bear market.

Stock Market Valuations Declining

Since the beginning of 2022, S&P 500 valuations have gone from 22x forward-looking earnings to about 17x, bringing stocks closer to their 25-year average. We know that the urge may be strong to look back to January and try to predict the valuation drop with rising inflation and the war abroad, but the reality is that bear markets are fairly unpredictable and can happen relatively quickly. 

History of Bear Markets

Understandably, these times may be unsettling, but we can gain perspective by looking at the history of bear markets. We are currently in our 14th bear market, which began in January 2022, and the stock market at its current worst has fallen about 24%. If we include the most severe downturns of the market – the Great Depression and the subprime mortgage crisis of 2008 – the average bear market loses about 41%. If we were to exclude those events then the average bear market loss is closer to 35%

We can also look at the duration of a bear market. The average bear market lasts about 20 months. If investors can begin to think about their investments in five-year increments, it might be easier to realize that sticking with long-term time horizons may be beneficial.

That last point is important: Bear markets are much shorter, on average, than a bull market run (about 51 months). And a bull market’s run averages a return of 162%. So investors who think proactively instead of reactively in long-term situations will likely be rewarded for their patience as the stock market turns around. 

Why We Can’t Mark This as a Recession

As mentioned above, the labor market is still tight. As of June 2022, the ratio of job openings to job seekers was about 2 to 1. There are a multitude of reasons behind this: the pandemic certainly caused fluctuations in the workforce as did stimulus payments. But many baby boomers and early retirees dropping out of the workforce contributed as well.

Inflation plays a part in this, too. A record number of workers are quitting their current jobs in search of better paying roles. As the economy cools, we may see that the job market stabilizes. However, inflation is still at a 40-year high; in June 2022, inflation was up 9.1%, with costs for energy, shelter, and food skyrocketing. 

The Fed’s primary target is to fight inflation, with the expectation that the Federal Funds rate will be between 3.5% - 4.0% at the end of the year. The Fed has already stated that they will continue to raise interest rates moderately through next year as well, but the market is anticipating that the Fed might actually start to ease rates in late 2023.

Consumer Confidence/Sentiment at Record Low

Unsurprisingly, consumer confidence is at one of the lowest points on record. However, tracking the history of these low points has shown that the S&P 500 industry return over the following 12-month period results in a positive average of 24.9%. While nothing is, of course, a guarantee, the reason for this index return upswing after a low point in consumer confidence/sentiment could be because stock market valuations start to look more attractive after being oversold. 

What should investors do in a bear market?

If you have concerns about your investments in a bear market, one of the first steps you can take is to review your risk tolerance. If you have high risk investments and would like to review your portfolio to see if there are areas in which you can moderate your risk, we are happy to help.

Contact us today to help you assess your current portfolio and risk tolerance so that we can ensure your long-term outlook will be beneficial and rewarding.


The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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