What You Need To Know About Recessions And Bear Markets

As global markets continue their roller coaster ride due to fears surrounding the coronavirus, we all watch the news and are in the know of the recent events.  The question most folks are asking is “What is going to happen?” Some believe that the Coronavirus will rapidly spread impacting millions and others think it will impact a small portion of the global population and be a distant memory in a few months’ time.  And there is every possible scenario in between.

When it comes to investing, if you know things will get much worse and you could tell when things will get better, as Warren Buffet stated recently “ you’re gonna get fabulously rich if you’re right – If you knew what the market was gonna do obviously. But you don’t– I don’t think anybody knows what the market’s gonna do”

When it comes right down to it and you come to terms that the market just cannot be timed successfully and you don’t know with certainty what is going to happen, you stay the course.  You stay the course because there are really only two possible outcomes.

  1. The world ends and we live in a post-apocalyptic world where retirement and financial planning doesn’t matter.
  2. The world does not end, and this crisis passes, schools re-open, Starbucks sells coffee, Apple sells iPhones, the NBA plays basketball and business gets back to doing business.

If you are in the camp of business getting back to doing business, then it is important to realize that every bear market is caused by a unique set of circumstances that cause declines, sometimes significant declines in stock prices.  It is important to recognize that every bear market regardless of how low prices went or how long they lasted, had declines that in every case were TEMPORARY.

From my experience, investors that are fearful and panic tend to make bad decisions.  Time and time again we have witnessed folks going to cash to wait things out. They tend to sell at bad times and lock in realized losses and in many cases, miss out on the proper timing to get back in, because getting that right is simply impossible to do.

Smart investors reinvest their dividends, rebalance their portfolios through pullbacks capitalizing on the ebbs and flows of stocks and bonds and take advantage of tax loss harvesting, helping to reduce the tax drag of their portfolios.

Since our most recent bull market has officially turned into a bear market, it seems like a good opportunity to discuss with you what that actually means, and are we on the verge of another recession like the one we had in 2008?

Today we’ll share what you need to know about recessions and bear markets. If you are worried about your portfolio, we understand and we’re here to help. Feel free to contact our office to get answers to your specific questions. 

What Is A Bear Market?

A bear market happens when an overall market benchmark, such as the S&P 500, dips by 20% or more from its most recent high. (1) This is often accompanied by negative investor sentiment and more selling than buying.

It’s important to highlight that normal stock market volatility isn’t an indicator of a bear market. Normal dips and swings are necessary for long-term growth and shouldn’t be cause for concern.

What Is A Recession? 

A recession is defined as two consecutive quarters of economic decline (emphasis on the word economic). They’re measured using factors such as the employment rate, gross domestic product, bond yield curves, and other factors independent of the stock market. (2)

Economists declare recessions retroactively. For example, the Great Recession wasn’t confirmed until November 2008—11 months after it started. (3)

Bear Markets Vs. Recessions: How Are They Related?

A bear market relates to the stock market. A recession relates to the economy. Contrary to popular belief, the stock market is not the economy. What drives the stock market is earnings and investor emotions—which the latter, as we all know, can be fickle. As humans, we tend to be overly optimistic when there’s no data to support our feelings, and pessimistic when data looks great.

Recessions are the complete opposite. Tangible factors determine the state of our economy. There’s no emotion involved. Which begs the question: Why do people correlate recessions and bear markets? 

If you look back on history, recessions and bear markets have usually occurred around the same time. Of the last 11 S&P 500 bear markets we’ve had since 1957, 63.6% came after a recession. (4) The two go hand in hand, but they’re not the same.

Not even highly educated economists can predict a bear market or recession. There’s a lot of speculation that goes on in the news, but it’s just that—speculation.

What Should Investors Do?

First, what NOT to do- Capitulation to a bear market has most often turned out to be a tragedy from which many investors’ financial and retirement plans never recover.  The tragedy is sharpened even further by its timing. If one sells when the market has declined 25 percent, the remaining average decline has only another ~8 percent or so to go, measuring from the top.  Based on research from Yardeni, Inc. post WWII, there have been 11 bear markets with an average decline of -33 percent. To give up at this point to only find out later that one was closer to the bottom than the previous peak is in my professional opinion a tragedy.

What to do: The best thing to do as a long-term investor is to ensure your portfolio is designed based on your goals.  Start with your goals, then build your plan, then and only then design your portfolio to meet your goals.  

Next, perspective is crucial – View bear markets through the lens that The Great Companies in America and the World are on sale.  Indeed, with the S&P 500 down approximately ~20-25 percent from the previous all-time high, they are enjoying markdowns which you historically don’t see more often than about one year in five (on average).

Now you don’t get the fire sale prices unless there is a fire.  And the current apocalypse de jour “Coronavirus” is, by some measures, a pretty big fire.

But we always have a choice.  We can focus on the fire itself and the financial media, shrieking about Armageddon always seems to help stoke the fire.  Or we can focus on the sale prices and look ahead to better days which historically always come next.

The last point, in English: the first leg up is often as sudden and sharp as was the last leg down. (Look at the V-shape of the six months on either side of the epic March 2009 trough for example).  I repeat that these are historical observations, not predictions

I cannot encourage you too strongly to begin focusing on the sale prices, as my clients and I are doing and I am not predicting when and where the sale will end, that is, where the market for the shares of Great Companies will bottom.  (I can and do predict that if you wait to be sure the bottom is in, you’ll have already missed it).

Speak With Your Advisor

Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third party during times like this. Human nature causes us all to act out of emotion when our accounts go down. As an independent firm, we put your best interests first. We seek to serve as a support system for our clients, helping them make informed financial decisions that are not driven by emotion.

We’re Here For Your Friends And Family

You may have peers, friends and even family members who have expressed some significant distress over the market’s current decline.  I would be most happy to meet with them, at the very least to offer some long-term reassurance, and to give them some insight into my investment policy and some perspective on the current situation. Sometimes simply speaking with a Wealth Advisor may help the ones you care about feel more confident and less concerned with the most recent market activity.

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(1) https://www.investopedia.com/a-history-of-bear-markets-4582652

(2) https://www.bankrate.com/personal-finance/smart-money/watch-these-indicators-know-when-recession-could-be-coming/

(3) https://www.usatoday.com/story/money/2019/08/19/recession-what-does-mean-and-what-like/2030642001/

(4) https://dqydj.com/relationship-bear-markets-recession/


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