Trees Don’t Grow to the Sky And Bear Markets Don’t Last Forever
“I’ve been here before, and I know how the story ends.”
From time to time, the markets can go stark-raving mad, as occurred on the upside in the 1990s. The same happens on the downside. We have seen the market take wild drops between 1929–1931 and 2008–2009. We recently went through a five-month bear market between February 19, 2020 and August 18, 2020 when the market recovered all of its losses to the break-even point.
Your primary defense against being swept up in the madness of such periods is a command of the history of the financial markets and the resulting ability to say to your clients, “I’ve been here before, and I know how the story ends.”
Learn the Historical Details of the Market
If you haven’t been through a bear market as a Financial Advisor, then you need to learn historical facts about bear markets to steady yourself and your clients. Learning, comprehending, and communicating key statistics about down markets will help you reassure yourself and your clients when the bear appears.
| Bear Markets Since 1950 | Calendar Days to Bottom | U.S. Stock Market Decline (S&P 500 Index) |
| August 1956 to October 1957 | 446 | -21.5% |
| December 1961 to June 1962 |
196 |
-28.0% |
February 1966 to October 1966 |
240 |
-22.2% |
November 1968 to May 1970 |
543 |
-36.1% |
January 1973 to October 1974 |
630 |
-48.2% |
November 1980 to August 1982 |
622 |
-27.1% |
| August 1987 to December 1987 |
101 |
-33.5% |
July 1990 to October 1990 |
87 |
-19.9%* |
March 2000 to October 2002 |
929 |
-49.1% |
October 2007 to March 2009 |
517 |
-56.8% |
Bear markets are typically defined as declines of 20% or more from the most recent high, and bull markets are defined as an increase of 20% or more from the bear market low. But there is no official declaration, so in some cases, there are different interpretations regarding when these cycles begin and end.
Bull Markets Last Longer Than Bear Markets
You also need to learn some key details of bull markets. On average, bull markets lasted longer (1,955 days) than bear markets (431 days) over this period, and the average bull market advance (172.0%) was greater than the average bear market decline (-34.2%).
The Rollercoaster Bull and Bear Market in 2020 Followed This Trend
The bull market, which began in March 2009, ended on February 19, 2020 when the S&P 500 closed at 3,386. Unfortunately, the “Black Swan” event of the COVID-19 pandemic caused the U.S. economy to contract, which triggered the bear market. Over 33-days, the S&P 500 dropped 34% and hit bottom on March 23, 2020 when it closed at 2,237.
The Fast But Rough Ride of the Bear Market
This bear market came and went quickly. The S&P 500 rallied to its break-even point by August 18, 2020 when it closed at 3,389. Hence, the bear market lasted 149 days from the bottom or 181 days from the previous top. The market ended the year at 3,756, up 68% from the bottom of this cycle.
Key Point: Don’t Allow Fear to Derail the Long-Term Goals of Your Clients
If you’re reconsidering your current investment strategy, a volatile market is probably the worst time to turn your portfolio inside out. Dramatic price swings can magnify the impact of a wholesale restructuring if the timing of that move is a little off. A well-thought-out asset allocation and diversification strategy is still the fundamental basis of good investment planning. Changes in your portfolio don’t necessarily need to happen all at once. Try not to let fear derail your long-term goals.
Resources:
[2] https://www.psychologytoday.com/us/articles/200306/our-brains-negative-bias
Copyright© 2021 Cannon Financial Institute - All Rights Reserved
Subscribe to Cannon Insights at http://www.cannonfinancial.com/newsletter/subscribe
Contributing Writer: Subject Matter Expert Charles McCain