On Monday, June 13, investors began the week by digesting a new spate of bad – albeit familiar – news: Inflation continues to surge. In response, the markets sank swiftly and sharply, pushing the S&P 500 officially into bear market territory.1 (A bear market, as you may remember, is a drop of 20% or more from a recent peak. In this case, the “recent peak” was all the way back on January 3 of this year.)
Having helped clients navigate – and even take advantage of – several bear markets in my career, I’ve found that looking solely at that 20% number can paint a picture of pure chaos in the markets. But not all bear markets are the same. Some are long, some are short. Some come with economic recessions and others don’t. Some catch investors completely unawares, while others come on more gradually. For this reason, it’s better to focus on the reasons behind the number rather than the number itself. When we concentrate on the cause instead of just the effect, suddenly a bear market doesn’t seem so abstract or bewildering.
What a Bear Market Means
Have you ever been driving on the road and hit every green light on the way to your destination? It’s a great feeling, isn’t it? Well, that’s sort of what a bull market is – and the road is the journey to your financial goals.
A bear market is the opposite.
During a bear market, the road to your financial goals, for the foreseeable future, is like getting caught at every red light in a major traffic jam. We’re still progressing toward your goals, but we’re inching instead of cruising. Sometimes, we may not move at all for a while. Sometimes, it may be necessary to take a detour and backtrack. It’s not fun, but it’s also not the end of the world. Because here’s what a bear market doesn’t mean:
Have you ever been caught in rush hour traffic, and the lane you’re in just won’t budge? Meanwhile, the lane next to you seems to be moving just fine. So, as soon as you see an opening, you merge into that lane – only to immediately slam on your brakes. Now the new lane is backed up! So, you try again…until you find yourself in the very lane that’s closed off and causing a traffic jam in the first place.
This is what emotional, undisciplined investors do during bear markets. They start frantically trying to change lanes, get off the road, or even abandon the car altogether. As a result, they burn fuel, waste time, and end up making the situation worse – because they aren’t where they need to be when the road gets cleared and the traffic speeds up again.
They aren’t there when the bear market inevitably ends, and a new bull is born.
You see, history doesn’t show us how long a bear market will last. Until now, we’ve had three bear markets in the 21st century. The first, in the early 2000s, lasted 929 days. The second, amidst the Great Recession, lasted 517. But the third, back in early 2020, lasted only 33.4 What history does show us is that bear markets are always temporary. The markets always recover – and the recovery can be a generational chance to get in the next bull market on the ground floor.
Warren Buffett once said, “The stock market is a device to transfer money from the impatient to the patient.” If we can remember this; if we can remember what a bear market means and does not mean, we can not only weather this volatility…but turn it to our advantage in the long run. Because while a bear market may signal the end of a bull, it does not signal the end of our investment strategy. Your financial plan. Or your journey toward your financial goals. Because, at the end of the day, we’re prepared for this. Our car is tuned up, and there’s plenty of gas in the tank.
A bear market just means we might have to sit in traffic for a while.
Below is a chart from Capital Group that shows a history of U.S market declines.
The bottom line? Accept declines as a normal part of the investment cycle.
My team and I will keep a close eye on what the Fed does and how the markets respond to it. Expect to hear more from me on this subject soon. In the meantime, please let me know if you have any questions or concerns about the road ahead.