Are we in a Bear Market?
The past month has been a wild ride on the stock market with thousand point swings beginning to look routine. You have probably heard a number of pundits declare that the bull market is over and we are officially in a bear market.
Are we in a bear market? How can we tell? Should you care? Let’s discuss those important questions.
What is a Bear Market?
A bear market occurs when the stock market drops 20% from a recent high.
So are we in a Bear Market Right Now?
In late September, the S&P 500 index reached an all-time high 2,940. On Christmas Eve the S&P 500 closed at 2,351. That is a 20.3% drop so technically we crossed that threshold for a bear market.
The 20% drop can feel like a bit of an arbitrary number and a decent day can push the index under that 20% threshold. This point was made extremely clear by the fact that between boxing day and new years eve the S&P 500 increased by over 6.5%.
Whether the market is down 20% or 15% is not interesting to me. I think it’s important to consider other characteristics of a bear market.
What are some other Characteristics of a Bear Market?
Volatility- One of the defining characteristics of a bear market is high levels of volatility. The stock market is considered volatile when there are wild swings up and down.
Volatility is best demonstrated visually so let's examine two charts that demonstrate consistent returns in a bull market compared to volatile returns in a bear market.
First, here are the returns of the S&P 500 Index from the past 10 years (One of the longest bull markets in history)
Apart from a few dips the stock market had been steadily climbing for a decade.
Second, here are the returns of the S&P 500 over the past year.
This is what volatility looks like. Sudden and massive drops followed by spikes in prices. Looking at this chart you might be surprised that the market is within 3.5% of where it was a year ago. It was a wild ride to end up close to where we started.
Investors younger than 35 probably began investing during sometime between 2009 and 2017 (myself included) and are just now getting their first real taste of volatility. It’s understandable if this volatility has young investors spooked, which leads us to another characteristic of a bear market.
Investor Confidence- During a bull market, investor confidence is riding high. During these periods investors focus much more on positive news and don’t let negative news sap their confidence in the stock market.
During a bear market, the opposite is true. Confidence sags and investors begin focusing on all of the negative headlines. From what I can tell that certainly appears to be the case right now.
The trade war, interest rate increases and the government shutdown seem to be dominating headlines and nobody seems to be paying attention to the steller GDP and unemployment data.
Whether you are going by the numbers or how the market is behaving, all signs indicate that we are in a bear market.
When was the last Bear Market?
The last bear market ended in the first half of 2009. This would be the first bear market since the financial crisis. Which has made for many sensational headlines. Nothing stirs up panic and clicks like making comparisons to the financial crisis.
There is no indication that the next bear market or the next recession will even remotely resemble the financial crisis. There was a very specific set of circumstances that made the 2008–2009 recession as painful as it was.
Bear markets and recessions are an ordinary part of the business cycle and while painful, they are not an economic apocalypse. It is unreasonable to expect that the stock market and the economy will keep increasing at a spectacular rate every year. There will be down years, that’s life.
Should I be Worried?
Not unless you need to sell any of your investments to cover living expenses over the next few years. Another characteristic of a bear market is fear. Investors fear the worst is going to happen and make fear-driven decision to sell their stocks.
When the stock market declines, you experience a paper loss. If you sell when the stock market declines you lock in a real loss. The people who got burned the most during the financial crisis were the ones who panicked and sold at the bottom of the market.
If you have a financial advisor, call them and talk it out before you make any fear-driven decisions about your investments. If you want to read more about why your brain will is working against your investment interests, check out this story.
The key to becoming a better investor is to do nothingmedium.com
How long do Bear Markets Last?
This chart by Financial Trust provides a nice visualization of the history of bull markets and bear markets.
- Since 1926 there have been 9 bull markets lasting 9.1 years on average.
- During that same time period, there have been 7 bear markets lasting 1.4 years on average.
If we are indeed entering a typical bear market expect 2019 to be an even worse year for stocks than 2018.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.