What To Know and Do About Bear Markets

By John Egan on September 7, 2022

There is nothing enjoyable about market corrections or recessions. They create fear, anxiety and uncertainty, potentially requiring a change in plans — like reduced spending in retirement or an unanticipated job search. But when it comes to investing, perspective can go a long way toward successfully navigating these periods, uncomfortable as they may be.

Outlined below is some enduring, time-tested wisdom to help you stay grounded during periods of falling stock prices — and lower account values.

1. Corrections, bear markets and recessions are normal.

Volatility is an unfortunate but natural — even useful — component of markets because it is inextricably linked with opportunities to invest in assets at more attractive prices. The same can be said about recessions. They can both help reset expectations that become unreasonable at times and remove highly speculative (and often unproductive) investing that does not contribute to economic growth. Reminding oneself that these periods are normal and even healthy helps build perspective that such events can create as much opportunity as they do concern.

Frequency of Market Events Since 1950

Source: Capital Group. * National Bureau of Economic Research as of May 2022

2. Recessions and corrections are points in time, while wealth-creating bull markets happen over time.

Markets have been incredible creators of wealth over time. Below we demonstrate not just the frequency of bull versus bear markets, but the disproportionate outcomes skewed toward the positive. The total return of bull markets over time has been nearly eight times the drawdown of bear markets, and bull markets have persisted more than five times as long.

It is also worth noting that these returns happened over a period in which the U.S. was engaged in four wars (Korean, Vietnam, Persian Gulf and the War on Terror), a presidential assassination, civil rights protests, stagflation, higher interest rates, lower interest rates, multiple recessions and more.

Bull Markets Happen Over Time, Bear Markets Are Points in Time 

Source: Capital Group, RIMES, Standard & Poor’s. As of December 31, 2018. Bear markets are peak-to-trough price declines of 20% or more in the S&P 500. Bull markets are all other periods. Returns are shown on a logarithmic scale.

3. Timing the market is hard, and getting it wrong is costly.

Getting market timing right hinges on three variables: correctly timing the sell, doing it in a size large enough to matter, and correctly timing the buy on the way back in.

Successfully timing buys and sells is difficult because it requires having a solid understanding of the fact pattern and appropriate market reactions. To understand why this is so hard, let’s pretend it is 2019. You are told that next year the U.S. economy will go into a recession, unemployment will be high, large sections of the country will be shut down and more than 300,000 people in the U.S. will die from a pandemic not seen in modern times. Not only is that set of facts nearly unknowable ahead of time, but even fewer would look at that information and predict the market would end the year up 19%.

Moreover, the cost of market timing can be high when you get it wrong. As shown below, missing just a few of the best trading days can have a material impact on the overall return of a portfolio. Additionally, the vast majority of the market’s best days happen during market pullbacks. In other words, the most tempting times to make a move may also be the most dangerous.

Missing the Best Days in the Market

Source: Morningstar. Hypothetical growth of $10,000 invested in the S&P 500 index (TR) from January 1, 1980 to December 31, 2021.

4. Avoid recession obsession—don’t focus too much on the wrong thing.

In periods of market volatility, investors’ gazes often turn to judging whether a recession will occur. But recession-seeking may be a red herring: While investors attempt to look forward to predict the future, economic data is inherently backward-looking. On average since 1950, markets have peaked seven months prior to an economic peak and bottomed three months before the economy began growing again. While a recession may help provide context around the potential depth or length of a pullback, it may not be the most helpful focus point for market outcomes.

Average S&P 500 Return vs. Industrial Production

Source: Capital Group. 1950 – 2019

5. Investing based on emotion may feel right at the time, but it’s unlikely to be profitable.

As humans, we are hardwired to act, especially when we feel uncomfortable. After all, both fight and flight are physiological survival mechanisms. Thus, we find it hard to do nothing.

One of our best proxies for emotion in markets is consumer sentiment. When sentiment is low, investors are pessimistic, and the innate feeling to act is high. If sentiment is high, investors are optimistic about the future. However, if we look back at how profitable feelings are, we quickly learn that following our gut may not be the most beneficial approach. In fact, investing when things feel the worst on average has been six times more successful than the opposite.

Returns of the S&P 500 Based on Investor Sentiment

Source: JPMorgan January 1970 – May 2022

In times of growth and strong markets, investors often lose sight of basic building blocks of well-allocated portfolios. Fear of missing out when markets run up is a powerful motivator. We believe the following are elements of a more optimal approach for long-term success:

1. Stay diversified – Diversification means admitting not knowing what the future holds. It also helps avoid acting in absolutes like “value will never come back” or “fixed income is dead.” The discipline of diversification often leads to a more robust approach that can help weather the inevitable storms that markets create.

• Stick to the plan – This means:
  • If you don’t have an investment plan, get one (you can contact us[LL2] ).
  • Designing an investment plan based on your unique goals (e.g., when you plan to retire, large purchases you plan to make in the future, etc.) and with a realistic appreciation for the amount of volatility you can tolerate.
  • Not changing your long-term plan unless your goals or tolerance have changed, and taking solace knowing your portfolio was designed with the knowledge that market downturns happen.
  • Channeling the urge to act with strategies—such as tax loss harvesting and rebalancing—that make sense in down markets but won’t take you off course from your long-term plan.

• Set your sights on the long term – Short-term expectations often lead to “flavor of the day” investing, which rarely stands the test of time. No strategy works all the time, especially when passing judgment based on a short window of time. Stay long-term, and let the markets work for you, rather than you working against them. 

For more information, or for help building an investment plan that can stand the test of time, please contact one of our advisors.

Important Note:

Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Indices cannot be invested in directly. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect our fees or expenses.

The S&P 500 is a capitalization-weighted index designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Disclaimer:

Hightower is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and

with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. All data and information referenced herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices or other information contained in this research is provided as general market commentary; it does not constitute investment, tax or legal advice. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Hightower or any of its affiliates shall not in any way be liable for claims and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice. Forecasts represent median expectations and actual returns, volatilities and correlations will differ from forecasts. These materials were authored by Fiducient Advisors and are being used with their permission. This document was created for informational purposes only; the opinions expressed are solely those of the author and do not represent those of Hightower Advisors, LLC, or any of its affiliates.