By Cindy Diccianni RN, CSA, CLTC, Financial Advisor
The topic of the “bear market” has been on the brains of investors since November. As a result, pundits and media experts alike have continually emphasized the topic as oil prices and housing foreclosures continue to threaten an already declining market. When your 401(K) or IRA plans constitute stock market investments, the views of these experts can be daunting, if not horrifying, when your statements show significant losses to your nest egg. A declining economy puts everyone in a tailspin, investors and companies included. Ultimately, understanding the terminology and historical trends of the stock market tends to ease some of these anxieties. So, what exactly is a bear market? The simple explanation may be: our current economic situation in which stocks are steadily declining, but what does that mean for the everyday investor who needs a bit more explaining?
Technically-speaking, a bear market occurs when stocks fall by 20% in the Dow Jones Industrial Average. The use of the terms “bear” and “bull” markets have been used in the stock-trading world since the 18th century and as such, have had significant histories with investors throughout their young two and a half centuries of etymological existence. The most well-known of the bear markets is most certainly the infamous crash of 1929, the prelude to the Great Depression, in which the Dow dropped a whopping 89% in July of 1932.(1) With a recovery time of almost two decades, the bear market of 1929 has become a notorious reminder in the back of investors’ minds not to let history repeat itself. The bear market of 1973-1974 was also a reminder about times when gas prices were rampant, stagflation increased, and a recession occurred. The crash of 1987 bore similarities, yet its recovery time was less than two years. Consequently, the correspondence of our current situation has caused some to believe that our bear market is merely growling before what is to come and there are warning signs as to why this may be the case, including the abundance of home foreclosures, bankruptcies, and increasing commodity prices. However, the recent decrease in gas prices over the past few months has provided new insight into what history has already proven – cyclicality.
Dating back to the crashes of the mid 1950s, stocks increased at a steady rate as early as one month after the market was labeled as a bear. According to an article in CNN Money from this past summer (when gas prices were spiraling out of control), the S&P’s investment strategist, Sam Stovall, found that the nine bear markets since 1951 gained averages of 3%, 5.6%, 4.7%, and 16.5% respectively during their recovery periods within one to twelve months. This makes sense since all markets are generally cyclical and require a patient turnaround time for recovery. Investors tend to “get in the same boat” so to speak when a majority of people decide to sell stocks because the market slumps and causes panic. In actuality, buying stocks at their low prices makes more sense since, although there is an initial decline, there is usually a cyclical upswing of increases during the recovery period. Ultimately, a long-term outlook is the key to this debacle.
Panic selling is definitely not the way to go if you’re looking to ride the waves of the stock market. This is why having money in safer investments as a cushion or safety zone is a good idea for those who do become upset with the downswings of the bear market. However, investors should note that the Dow Jones is not the only average that professional advisors use when gauging the market, so just because the market is termed a “bear” doesn’t mean all stocks are fairing as badly. In fact, the S&P 500 covers a wider range of stocks and provides a better picture of stock health. Unfortunately, during this economic period, most stocks are seeing negative gains outside the Dow. Nevertheless, there are several factors that must be kept in mind that provide a positive side to the bear’s current growls. For instance, the average duration of a bear market is approximately a year and a half. This only includes periods of decline and not stagnation, but as mentioned before, an upswing generally follows within a reasonable amount of time. The presidential election is also a positive factor for change as, generally speaking, rebounds occur when new administrations enter the White House.
The most important way to handle the bear market is to look at your situation and risk-tolerance. Although the thought of losing money is worrisome, it is important to position yourself with investments that you feel comfortable with for the ultimate security of your wealth. If you’re investing for the long term do not be discouraged by short-term losses – that’s the point of saving over a long period. Bubble markets tend to fizzle out during any time of economic, governmental, and technological shifts. Still, if you’re closer to retirement, this may mean changing your investment strategy to accommodate a need for funds in the near future; however, if you are in it for the long haul, try and look at the market as a pendulum that will always swing back and forth – it’s all about timing and the patience to wait for the inevitable upswing. As always consult your financial advisor with any questions or concerns related to your individual situation.
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