By Kristi De Rycke, Registered Assistant
Halloween conjures up many images of creatures that make our skin crawl. We have all watched horror movies that even years later can give us the creeps. The fear may be of clowns, zombies, ghosts or a man with sharp knives for hands. I know a guy who secretly admitted that when he is driving the combine alone late at night in a corn field, he wishes he had never seen Children of the Corn.
We have all been hearing another scary word lately in the media: Bear Market. Is it easier to watch the horror movie in broad daylight or in the dead of night? Easy answer, right? I dug through some resources to shed a little light on this topic. Having a flashlight handy when we see a bear won’t make it go away but will help us move through the woods quicker and with better agility.
What is a Bear Market and why is it called that. A “market dip” is any decline of less than 10%. A “market correction” is a drop of more than 10% but not 20%”. (I will further discuss this topic in the next few weeks.) The feared “Bear market” is defined by a 20% drop in any major U.S. stock index from their most recent highs. A bear market is so called because bear attack their prey by swooping their paws downwards towards the ground. Did you know that they occur on average once every 3 to 4 years? The average length of a bear market since 1926 has been 1.4 years. The average bear market drop since 1926 has been -41%. (1).
Keep in mind that these are averages and that means by definition they can be longer or shorter and less or more intense. Although some reports state that the U.S. major indexes fell into a brief bear market on December 24, 2018, the most recent prolonged bear market happened between 2007 and 2009. It lasted roughly 17 months and the S&P index lost 50% of its value. (2)
The beginning and end of a bear market can be a defined slightly differently. It has to be defined from an index’s most recent high but can be based on various time periods. It also can be measured by closing or intraday prices. Anyways, that is why you may hear conflicting reports. (1)
U.S. News and World Report (1) states there are many indicators that people use but they are not that reliable at always predicting a bear market. The causes may include a slowing economy, increased unemployment, decreased disposable income, tightening by the Fed or declining consumer confidence.
So….when will the next bear market start? Well, that will happen on…..just kidding! If I could predict that, my phone would be ringing off the hook and I would be traveling around the world in my immense yacht. We don’t know when, how intense or how long the next Bear market will be. It would be wise to meet with your financial advisor on a regular basis.
Some of the questions you may want to ask yourself and then discuss with your advisor may include:
How will you react if your stock investments decreased 40% tomorrow?
Do you have time for that investment to go back up over time?
What is your investment mix and is it still the right one for your current situation?
Should you be more conservative or more risky?
What is your purpose for that money?
Do you want it for something in the next 5, 10 or 20 years?
Do you need a correction or a bear market defined more clearly?
What are you most afraid of?
Turn the lights on! Discussing these topics with your advisor so you are ready for the next correction or bear market can help you face it head-on with less fear and anxiety.
A Bear Market will happen and unfortunately there isn’t a crystal ball to tell you when or even how severe it will be. One thing is for certain when it does happen you will hear a bunch of people say “I told you so” and "I knew it!" The reality is of course they knew it was going to happen. It always happens, its just a matter of how well prepared you are when it does happen. Working with a financial advisor and clearly defining an accumulation and distribution plan helps alleviate some of the worry. When I hear horror stories of people getting ready to retire and losing the bulk of their retirement assets I feel badly for them and am disappointed in their advisor. No one should be walking into retirement and have their entire nest egg invested in the stock market without truly understanding the risks associated with it. We try to work with our clients to help them build their portfolios according to their risk tolerance and objectives. As they near retirement we typically take a portion of their money out of the market or reduce risk so we can avoid the Big Bear affecting our plans. If you haven’t made those adjustments to your portfolio and are worried about the Big Bear coming, do something about it sooner rather than later.