Bear Market Musings
Well, its finally here - a Bear Market.
As many of you know, two popular measures of U.S. stock market performance are the Dow Jones Industrial Average, and the NASDAQ Composite Index. Wednesday, the Dow Jones Industrial Average closed at 11215.51, down 20.8% from its record close hit last October. A fall of 20% from the last market high is traditionally considered the definition of a Bear Market. The technology-focused Nasdaq Composite Index skidded 2.3% to end at 2251.46, also entering Bear territory.
From a historical perspective, no two Bear Markets have been alike. But we can get some ideas of what to expect in the coming months by looking at the averages and extremes of market performance in the more recent Bear Markets.
First, a definition: A Bear Market starts when stocks begin what turns out to be a 20% decline from its previous high point. It’s end is the bottom — seen only in retrospect after stocks have recovered by 20%. So, the timer starts today, and we won’t know the end until we surpass the market highs hit last October. Now let’s look at some statistics for Bear Markets since 1960 (sources The Wall Street Journal/Ned Davis Research):
Number of Bear Markets since 1960: 9
Average length of time: 14 months
Shortest Bear Market Time Period: only a few months
Longest Bear Market Time Period: A little more than 2 years
Average market decline: 31%
Smallest decline: 21% (remember it has to be at least 20%)
Largest decline: 45% (during the 1970s oil crisis)
With this wide variety of declines and timeframes, we want to point out three investing tips and reminders that our long-time readers have seen before:
1. Don’t think about trying to time the market, or think you know when the market bottom will occur. We don’t try to time the market and don’t know of anyone who consistently can.
And please don’t just move everything into money market funds because you are nervous about losing more. Remember - what’s important is where your balance is when you are retired, not when you are building up your savings. If the drops in your investments are causing you to lose sleep at night, consider changing the level of risk in your investments. Smart401k clients can get recommendations for reduced risk portfolios by signing into their account and retaking the Risk Tolerance Questionnaire.
2. Make sure you realign (rebalance) your investments to your target allocation percentages. This is a very uneven market - growth funds are outperforming value funds, domestic funds have been outperforming international funds. Emerging Markets funds have experienced wild swings (the average China stock is down 48% this year, while South American company stocks are up slightly). Chances are some of your investments have moved up or down significantly more than others. If you don’t rebalance to your target percentages, its likely that your overall investment risk has changed.
3. Don’t stop putting money into your account. Someone once said that stocks and mutual funds are the only things that people don’t like to buy “on-sale”. If you have a reasonable time horizon, history shows that the markets and most likely your investments will rise over time (but, past performance is no guarantee of future results).
One way to look at the current situation: the markets would decline by about 10% more to hit the average decline of a Bear Market. If we assume that someday the markets will recover, as they always have in the past, the recovery will be at least 20% - actually 30% from the average market low. By the averages, the upside is greater than the downside. The always agonizing question is ‘when will all this occur?” Based on history, the answer is, we won’t know until it’s already happened.
One last statistic: Number of Bear Markets where a recovery never occurred: zero.
Scott Revare
CEO, Smart401k
