3 Key Reminders for Navigating a Bear Market

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Dear Friends,
The S&P fell 21% since January 2022, resulting in the worst first-half performance since 1970. With US equity markets hovering in bear market territory, it is more crucial than ever that investors keep a steady hand.

However, there is a silver lining for investors. When the S&P 500 has fallen at least 15% in the first six months of the year, it has risen an average of 24% in the second-half. All the more reasons to stay patient!
Here are three key reminders for best ways to navigate a bear market!
1) Resist the Urge to “Do Something” (unless it’s moving cash off the sidelines!)
There is no way to predict how long or how severe bear markets will last, but what we can say, is the media has a tendency to create a negative outlook and a more alarmist approach. This creates panic and an urge to “do something,” like cutting down on equity exposure or selling out of stocks altogether. Neither of those impulsive decisions is a good one. Bear markets don’t last forever, in fact, they generally are much shorter than bull markets and tend to recover faster. The key takeaway here is, bull markets are longer and stronger than bear markets.


2) Remember that Bear Markets are Factored into Return Expectations
Most long-time equity investors know that the historical returns of U.S. stocks fall in the +8% to +10% range depending on the time period analyzed. But we sometimes forget that these expected, over-time returns factor in bear markets – even very significant ones like the 2000 tech bubble and the 2008 Global Financial Crisis. We still do not believe we are facing down this type of bear today – the U.S. jobs market is still historically tight, household finances and the U.S. consumer are still healthy, and corporate profit margins are high. We believe sentiment has fueled declines more than fundamentals have.
At the end of the day, an investor’s asset allocation should be established based on return expectations needed to meet a certain set of goals and objectives. If stocks are part of the asset allocation, which they usually are, then just remember that bear markets are always factored into your return expectations, and part of the investment cycle.
As the chart below indicates, the median return one year after a bear market begins is 26% — not a bad recovery!
3) Participating in the Rebound in Now the Top Priority
Once the market has crossed into bear market territory, the next 12-months return for equity investors has almost always been positive. The two exceptions since 1950 were the tech bubble bear market in 2001 and the Financial Crisis bear in 2008. Even with those two instances factored in, the median 12-month return for the S&P 500 following a bear market has been +23.9%. In other words, being invested once the stock market crosses the -20% level has paid off consistently throughout history.
The issue is that there is no way to know when the market will stage its strong recovery, though history does tell us that it usually happens in close proximity to the scariest down days. Here’s a key stat to remember: over the last 20 years, 70% of the stock market’s best days have occurred within two weeks of its worst days. This speaks to the perils of trying to time exit and entry points during heightened volatility like we’re seeing right now. Doing so means potentially – if not probably – missing out on the market’s best rallies that every equity investor needs to drive investing success.
With that, stay patient here. While we cannot know when the new bull market will begin, history tells us that it will start before anyone knows it, and that some of the best gains will happen in those early days. Investors should not be on the sidelines when that happens.
Please reach out with any questions.
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