On Monday, June 13, the S&P 500 concluded the day with a 3.9 percent decline, officially marking the entry of the U.S. into a bear market, as it fell nearly 22 percent from its January peak. Although there was a recent recovery that narrowly prevented the bear market, the current situation is inevitable.
While the idea of a bear market may sound alarming, it’s important to note that the last bear market was relatively short-lived. It occurred in early 2020 and quickly rebounded within six months, leading to a subsequent bull market by March 2021.
Although you might wonder how this impacts you if you don’t reside in the United States or invest in U.S. stocks, the reality is that the effects of a U.S. bear market can ripple throughout the global economy.
Before delving into practical steps to navigate the current bear market, let’s briefly define bull and bear markets. A bull market refers to a 20 percent rise in stock prices after two consecutive 20 percent declines, while a bear market is declared when stock prices have fallen by 20 percent or more from a recent high and continue to stay low for an extended period.
Throughout history, markets have experienced ups and downs, but a broader perspective reveals that the market has always recovered in the long run. The Great Depression of the 1920s and 1930s, the dot-com bubble burst in the early 2000s, and the global financial crisis of 2008 and 2009 are notable bear market examples. Despite these downturns, the market eventually recuperated.
Now, let’s address the causes of the current bear market and discuss potential recovery scenarios.
Factors such as increased inflation, the Ukraine conflict, and China’s economic slowdown have contributed to the ongoing bear market. Investors are concerned about the economy and reevaluating their investment strategies, resulting in a significant sell-off of stocks and other commodities.
Signals from the Federal Reserve regarding potential interest rate hikes have raised concerns about the cost of borrowing, which could lead to a recession if rates rise too quickly or excessively. A recent poll conducted among economists revealed that nearly seven out of ten believe there will be a U.S. recession in the next year if inflation rates continue to surge and geopolitical tensions worsen.
Historical evidence suggests that markets always recover, often returning even stronger. Therefore, the question becomes not if, but when the markets will rebound. However, it’s important to acknowledge that the situation may worsen before it improves, given rising costs and slowed growth in today’s market.
Considering these factors, let’s discuss actions to avoid and practical steps to take during this bear market.
Actions to avoid
- Avoid panicking: Short-term decisions based on market fluctuations can negatively impact long-term gains.
- Avoid selling investments unless necessary: Realize that losses are not realized unless investments are sold. Only sell if you need the funds or have lost faith in the long-term performance of the investment.
- Avoid halting investments (if financially viable): Stopping investments during a market decline may cause you to miss out on purchasing assets at lower prices. Remember that time in the market is more important than timing the market, and taking advantage of future growth is crucial.
Recommended actions
- Diversify your investments: In times of market downturn, diversification becomes even more essential. Spreading your investments across various assets, markets, industries, and company sizes helps mitigate risk. For instance, investing solely in the tourism and hospitality sectors during a decline could lead to significant losses. However, diversifying into technology and healthcare sectors can offset those losses.
- Rebalance your portfolio: Regularly assess and adjust your portfolio to align with your risk tolerance. Avoid overexposure to specific asset types and maintain a comfortable level of diversification, adjusting holdings as industries fluctuate. As you age or have a shorter time horizon, it’s generally advisable to take on less risk.
- Reduce expenses and increase income: During uncertain times, such as a possible recession, ensure you can cover your expenses. Evaluate and reduce your expenditures, and if necessary, explore opportunities for additional income, such as negotiating a raise or starting a side hustle.
- Dollar-cost averaging: Attempting to time the market perfectly is impractical. Investing consistently throughout market highs and lows allows you to average out purchase prices and reduces the need for market timing. Keeping funds available for potential investment opportunities is also a wise strategy.
- Stick to your investment plan: Emotions can run high during market volatility, but it’s crucial to maintain a rational mindset as an investor. Remember your long-term investment goals and stick to your plan. Stay informed about market developments and remember that current fluctuations are usually temporary. Learn from past investment mistakes as they provide valuable growth opportunities.
Disclaimer: This content is for informational purposes only and should not be considered legal, tax, investment, financial, or other advice.