Hope you are all doing well. The year-to-date sell-off in stocks accelerated, as the major U.S. indexes fell around 3% to 4% for the week. The S&P 500 barely avoided entering a bear market at Friday’s close after having briefly fallen earlier in the afternoon to a level 20% below its record high set on January 3, 2022. The S&P 500’s weekly losing streak now stands at seven weeks in a row, the longest since 2001. Since we had a close encounter this week with a bear market, I categorized this week’s advice using tips on what to do in an actual bear encounter.
This is the most important piece of advice. Don’t panic and run for the exits. Just like in a real bear encounter, screaming or sudden movement may trigger an attack. Selling out when things are bleak causes your losses to be more than just on paper. Emotions can lead to irrational decision making and impulsive decisions that compromise the realization of stated goals. Before you react impulsively, make a list of your concerns, and schedule an appointment to revisit your goals and review your strategy.
Do NOT allow the bear access to your food
If a bear gets to your food it only makes the problem worse. The same thing in a bear market. The money you need to live on in the next couple of years (your food) should not be in the market. Your assets should be properly segmented so that the money in the stock market is not money you are planning to spend in the near term. The average length of a bear market is 289 days, or about 9.6 months. Therefore, if the money you have invested in the market is not money you plan to spend in the next year or two, there should be much less reason for concern.
Wait until the bear moves away
Most bear encounters end without harm. The same is true for bear markets. Wait out the volatility. If you have properly segmented your allocation this could require you to spend down some of your safe liquid assets like savings accounts and money markets. The markets will eventually bounce back if you wait. You will have an opportunity to sell and replenish the safe assets you are burning through when the situation improves.
Do NOT drop your backpack
Don’t abandon your plan. I believe what we are experiencing is more like a non-recessionary market correction, even if the market dips below a correction (10% drop) into bear market territory (20% drop). History has offered a favorable outlook for these periods. Since 1970, the return is, on average, 17% in the six months after the market bottoms. If you consider the last two major market downturns – the 2018 growth scare and 2020 pandemic downturn – both had a couple of things in common. First, markets recovered their losses in these periods relatively quickly, around three months on average. Second, what drove the recovery was that the Federal Reserve stepped in and signaled lower interest rates ahead. The key difference in the current pullback is inflation. The Federal Reserve is on a mission right now to raise rates and fight inflation. Inflation will likely moderate in the months ahead and come down gradually. If the Fed does see a trend of lower inflation, perhaps confirmed by three or four lower readings, we could see a shift in its rhetoric and pace of rate hikes which will be a catalyst for the markets to move higher.