SWFG: Bear or no Bear? Does it Matter?
“Lethargy, bordering on sloth, should remain the cornerstone of an investment style.”
Warren Buffett
At a time when many investors have become antsy about the U.S. stock market, one thing we did not need was an aggressive military incursion in Europe. But that’s what we got, and as the Russian annexation of parts of Ukraine dominated the headlines, it is drowning out any positive news about the actual companies being traded. You are probably not hearing that earnings for companies in the S&P 500, in aggregate, rose 22% last quarter, or that overall economic growth in the U.S. continues to be unusually robust.
Veteran investors tend to scratch their heads when eye-grabbing world events trigger market downturns. Why? Because it’s hard to see any clear way that troop movements in Ukraine materially impact (as in: diminish) the actual underlying value of the companies they’re invested in. History tells us, pretty clearly, that once these times of headline panic have passed, stock prices migrate back to whatever they have been worth all along. This has happened through some events that were much more dramatic than what we’re facing today: World War II, the Cuban Missile crisis, the Kennedy assassination—and, more recently, the sudden realization that the Covid pandemic was a real threat to our collective health and safety.
In U.S. stock market history, bear markets—defined as a drop of 20% or more for a broad market index—happen roughly every 5.8 years. With what has occurred in the markets the last few weeks, we may be in the early stages of a new one.
Or we may not—and that, of course is the problem. It is very easy to see these market downdrafts in retrospect, but impossible to know when one is occurring, or to predict them in advance. Nor can we know how far down they’ll take us or when the recovery will begin. You can click here for recent commentary from Raymond James Chief Investment Officer, Larry Adam.
Some of the longest declines were triggered by major geopolitical events3:
- The attack on Pearl Harbor that pulled the U.S. military into World War II (a 308 day downturn, nearly a year)
- Iraq’s invasion of Kuwait in 1990 (108 days)
- The terrorist attacks of 2001
- The North Korean missile crisis of 2017
In 2008, the collapse of Wall Street speculation nearly brought down the entire global economy. More recently, in 2020, the emergence of a major global pandemic. This caused a rapid decline which was, as most of us remember, followed by a precipitous rise in market values that has continued through the end of last year.
As a consistent reminder - since 1951, the U.S. markets have experienced the following1:
- An AVERAGE intra-year decline of 13.7%
- The market is historically down at least 10%+ every 1.2 years
- The market is historically down 20%+ once every 5.8 years
At the moment, it’s not easy to see a major catastrophic trigger that would cause investors to race for the exits, but there have been other bear markets where a bull market simply ran out of steam—a recent example is the bursting of the dot-com bubble in 2000. The hardest-hit investors in that period were all crowded into the latest craze—tech stocks—and the tech-heavy Nasdaq index didn’t recover its former value until 2015. The lesson there was not trying to time the market but to maintain the discipline of diversification despite the temptations of rising valuations.
Which brings us back to the possibility that we’re entering a bear market today. Taking another look at history, since 1929, the average duration of these 20%+ downturns is 21 months1—and it is just as impossible to predict these durations as it is to predict the downturns to begin with. The Covid-related downturn in 2020 is a terrific example of how unpredictable the recovery can be. The pandemic news didn’t change from February to April 2020, but the markets recovered anyway, and were not discouraged through the ensuing political drama, the Delta and Omicron variants, and the highest inflation rate in decades.
The most important historical fact is that every bear market in U.S. history has been followed by new highs. Since 1950, we have experienced 53.8% up days in the market and 46.2% down days4, and the magnitude of the positive days has exceeded the magnitude of the downdrafts. The champion investors always have some cash or cash-equivalents in their portfolios, which lets them buy when the markets go on sale—which is perhaps the best way to view bear markets: as an opportunity to buy valuable stocks at a discount.
Warren, Jacob and I will continue to work hard to earn your trust. We earn that trust over time by being mindful of our Manager Selection, your asset allocation, raising cash ahead of your future income needs, and being proactive with you. Oh, and also being a bit “slothy” in deference to Mr. Buffett.
Thank you for the trust and confidence you have placed in us and giving us the opportunity to provide education to you on your financial journey.
As always, thank you for the introduction of your friends and family that so many of you have made. We are honored to serve you! As a service to our clients, we are happy to act as a sounding board for your friends and family. If any of them should need a second opinion on their financial situation, introduce them to www.striblingwhalen.com or call us at 678-989-0048.
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Regards,
Warren D. Stribling, IV, CFP®
Principal
warren.stribling@striblingwhalen.com
Brian E. Whalen, CFP®, CIMA®, AIF®
Principal
brian.whalen@striblingwhalen.com
Jacob Beauchamp, AAMS®
Financial Advisor
jacob.beauchamp@striblingwhalen.com
Sources:
1American Funds: Long-Term Investors can Weather Market Declines
2https://www.investopedia.com/terms/d/dotcom-bubble.asp
3https://www.thebalance.com/u-s-stock-bear-markets-and-their-subsequent-recoveries-2388520
4https://www.kiplinger.com/slideshow/investing/t052-s001-8-facts-you-need-to-know-about-bear-markets/index.html
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