I saw a show on Discovery a few months back, and the topic was how to survive an attack by a bear. This is not something I had ever contemplated, as there are generally not many bears appearing on golf courses or baseball diamonds. I must admit that my natural instincts would have told me to turn and run like a banshee to try and escape the threat – likely while screaming loudly. And it turns out that this is precisely the wrong thing to do. Rather, you are supposed to remain calm and not make sudden movements and let the threat pass on its own.
It turns out that there are a lot of parallels with this story, and the emotions that we are feeling as we hear that the stock market has officially entered bear market territory as of yesterday’s close of business. We may want to panic with the volatile trading that took place on Friday and Monday. We may want to scream in frustration over perceived losses to our portfolios, even though those “losses” are only triggered if we join the panicking crowd and place trades to sell. It is normal to feel like remaining calm should be the LAST thing that we should do.
Let’s look at what a Bear Market is. It is defined as an index dropping at least 20% from some previous high-water mark. Since 1950, there have been eleven such times that this has happened, including just two years ago during the “COVID Bear” when COVID-19 was first becoming known, and shutdowns were occurring. Here are some fascinating numbers just looking at these last few years.
While this is frustrating and emotion-inducing when you are living through it, look back just more than two years ago and you’ll find that the S&P 500 hit a low point of 2,237.40 on March 23, 2020. That means that the index is up 67.59% from then until now. Look back even further to the low points of the last major bear markets, and you’ll find the numbers even more amazing:
The ongoing upward trend in the markets is partly to blame for a common tendency among investors. In good times, they make the mistake of pegging the highest value they ever saw on a statement. That is the new “I have this much money” moment, and in the past few years we have seen the bar raised to a higher number many, many times. As markets correct, the second mistake is made when people shift this focus to “I’ve lost this much money” and the emotional dark cloud sets in. The reality is that portfolios are being built for decades into the future, and current price changes only impact investors who need to sell that day. That’s why we maintain cash and other conservative investments for those drawing on portfolios, as we do not want to sell when prices are temporarily depressed like they are now.
That leads to another significant mental strain that people put on themselves during rough market conditions – playing the “why” game in an attempt to understand the markets movement, and perhaps find a way to outsmart it. There are so many items showing up in the narrative right now: slowing GDP growth, high inflation, overvalued securities, gas price worries, the war in Ukraine, the Chinese economy, and more. Are these facets part of the overall picture? Likely yes. But the reality is that stock prices are determined by the supply and demand of the free markets. Right now, the markets are going down because negative sentiment outweighs positive viewpoints. The value of a stock is what someone is willing to pay for it, and right now those numbers are depressed. However, some stocks are being priced like they are going out of business and that sentiment will change at some point and fundamentals will be back in focus. The narrative will change. Counterintuitively, periods like now are one of the better times to accumulate positions in good companies, which is why we rebalance.
Bear Markets are not uncommon and are also nothing to be feared for long-term investors. The overall trend of the market is upward, but during that trend there will be bear markets, recessions, and significant market volatility along the way. That is part of long-term investing and cannot be eliminated. The key in times like these is to hold your ground and do what we have stressed for so long – keep cash on hand for multiple years of living expenses, don’t try to time the markets, rebalance portfolios regularly, capture tax-losses where appropriate, and wait for the tide to turn. The bear will eventually walk in the other direction.