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The Bear Market Mistake

Make no mistake: Bear markets like the one we have just entered pose a real danger to long term financial health. The danger is: selling at the bottom and missing out on the recovery.


Most people understand that it is impossible to time the market, but it is almost impossible to keep a rational perspective when the daily headlines announce that the market is falling 4-10% in a single day. The natural question is: should I get out now and avoid more of the same?


Investment markets are in full panic mode ever since the World Heath Organization declared the COVID-19 virus to be a global pandemic. Simply put, markets do not like uncertainty…and boy do we have uncertainty. Traders on Wall Street are selling at virtually any price, which has caused the markets to drop into bear market territory. Make no mistake, this global sell-off will historically be fairly described as one of the fastest in U.S. stock market history, taking only 17 trading days to experience a decline of 20% or more. For reference, studying bear markets going back to 1915, the average number of days from peak to a 20% decline is 255, and the median is 156. Seventeen days…that is painful.


Historically, bear markets have been attributed to both economic-driven and event-driven variables. Think of things like a housing and/or credit crisis versus a world war. As you can see from the chart below, bear markets have been less impactful than their bull market counterparts. The average bull market lasted 6.6 years, while the average bear market lasted 1.3 years. If you just wanted to study event-driven bear markets like war, oil-price shocks or an emerging-market crisis, research analysts at Goldman Sachs recently published a report finding that the average event-driven bear market resulted in a 29% decline (keep in mind that is the average). The report notes that we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.


More history: everyone can likely remember what it felt like to be an investor in 2008 & 2009. In 2008, there were monthly gains on the S&P 500 of 12% (March), 6% (July), 15% (October) and 26% (December) – all of which were in the middle of large decreases as well. The bottom was not reached until March 2009, after which markets rallied 70% from the first week of March to the last week of December 2009. The first 43% took place in the first three months of that rally. There were drops along the way of 9% (June), 5% (September), and 6% (October). In each of those highs and lows throughout the two years, people were convinced they knew what would happen next. Some have even spent the last 11 years trying to pick when the next bear market would come. Like in 2011 when the market ended flat for the year and many analysts suggested this was the end of the bull market, only to be followed by the next three years totaling a 54.4% cumulative return. Flash forward to where we are today and although all of the headlines have been negative, markets have not responded to them all in the same way. There have been numerous up days and down days the past month. The actual “bottom” will likely be the day before a positive news announcement (maybe a successful treatment/vaccine or some downtrend in the virus), but we will not know it is the bottom until some time from now, because it will not look much different than all the other false positives that preceded it. For those who sold before some portion of the down trend, in order for their portfolio to benefit cumulatively, they will need to reinvest their portfolio at a lower place than where they sold. Two correct decisions need to be made: a sale at a high AND a buy at a lower price. Otherwise, the move to cash will end up costing them real money – not saving them anything. The takeaway: the bottom is not knowable, and if you let fear or greed dictate portfolio decisions, it will pose a real danger to your long-term financial health.


Markets have recovered from a huge variety of worries and disasters over time, including the Great Depression, World War I and II, Korea and Vietnam, the Oil Crisis of the 1970s, 18% interest rates in the early 1980s, Black Monday in 1987, the Tech Bubble bursting compounded by the September 11 terrorist attacks, the global debt crisis in 2008, and countless others. If you look back at the media headlines in each of these instances, you will find a consistent message: the world had permanently changed. This left most people wondering, “Will it ever recover?” Sound familiar? Of course, throughout that same time period, markets have risen a massive amount in the big picture. It feels like there will never be new highs, but there is yet to be a 12-year timeframe in which markets were not positive over the past 120 years. For the most recent context, markets returned to their previous high of November 2007 in March 2012 – less than five years.


There is only one rational answer to the question “Should I get out now and avoid more of the same?” It has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish. The best strategy has, in the past, been to ride out the downturn and experience the subsequent upturn - which may come tomorrow, next week, next month or even next year. Building and sticking to a plan may sound unoriginal, but it is a solid, disciplined strategy backed by historical data.


At McDonnell Capital Management, we pride ourselves on spending time with each client creating customized plans and investment allocations. It is market periods exactly like the one we are in where that work becomes so important and reinforced. Strategic allocation (long term mix of stocks, bonds, cash and alternatives) involves matching investment decisions to goals. Nothing about the current environment changes that approach. As an example, if you are near or just entering retirement, you likely have a mix of growth and income investments in your portfolio. Even if the first year of retirement is next year, the majority of retirement expenses are well above five years away. For goals that are greater than five years away, there are few historic timeframes where equities did not have corresponding five-year positive returns. Near-term distributions can come from cash reserves and non-stock portions of the portfolio, such as bonds, which have not retreated like stocks. If portfolios are designed properly, this inherently enables the investor to not “have to” sell stocks at a potentially adverse time.


When our lives are thrown into upheaval, it is difficult to stay disciplined. We are in the middle of real-life changes, something that is certain to be a global historic event. But these changes do not necessarily indicate a portfolio change, unless the timing of long-term goals has changed (like the potential need for funds to weather a period of unemployment). Global markets have seen eight bear markets over the last 40 years, or one roughly every five years. Each is unique, but they all share one common thread – they eventually end. Take a mental break from the screen time and remember the following: 1.) although we have become accustomed to otherwise, market volatility is normal; 2.) bear markets will happen; 3.) timing the market is futile; and, 4.) focus on your plan and needs (many of which are long-term).



Sources: Morningstar Direct; Bloomberg; Bob Veres, The Irrelevant Investor (“The Fastest Bear Market Ever”, 3-9-20); sections paraphrased from Gina Beall & Joel Cundick, Savant Capital; chart provided by FirstTrust Advisors. This paper and chart are for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future. Past performance is no guarantee of future results. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person.

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