Recessions & Bear Markets
In this video, we review a few graphics regarding the historical performance of the stock market during recessions & bear markets. For those willing to endure the declines we've experienced this year, we learn of the eventual rewards that the stock market can offer.
Video Transcript:
The question isn’t IF we go into a recession or bear market, but rather how long does it last. Let’s talk about how this is effecting your money, and when you’ll be rewarded for enduring the declines this year.
A recession by definition is two consecutive quarters of negative GDP growth. We’ve already had one, and at the end of this quarter if the fresh GDP numbers print negative again, that would meet the definition. As a PSA, don’t be alarmed when you see every news media outlet blasting out doomsday headlines.
Remember, they are in the business of clicks and views. So please don’t get sucked into the headline hype. CNBC is notorious for their “Markets in Turmoil” click-bait flashed on the screen during down days. You can see how the markets have performed following each of these aired segments…... So I have a lot I’d like to share on this video, so I’m going to try to keep it moving- but feel free to pause on any of the graphics if you’d like to view for longer.
Alright, back to recessions.
What we are looking at here is the US inflation rate. Circled in the red is where the rates peaked before the next highlighted gray bar – which is each respective recession. Now spikes in inflation don’t necessarily cause every recession, but you could argue that every inflationary spike has only been cooled by a recession.
So why is this important. Why should we not be ready to throw the baby out with the bathwater when we hear the word recession? Well the reality is, there is always a recession in our future, there’s always a bear market in our futre – the question is, is it 6 months away or 6 years away.
Let’s talk about bear markets, which is a 20% pullback from all-time highs. The S&P 500 is super close to meeting this definition. With most stocks already in that territory. Over the last 92 years of market data, 35% was the average decline, with it taking under a year to find the bottom. Then taking a little more than one-and-a-half years to break even on average. Interesting enough half of the index’s strongest single days actually occur during a bear market, and about a third of the best days happened during the first two months of a bull market- before it was clear a bull market had actually begun. In other words, the best way to weather the downturn is to stay invested, as its very difficult to time the recovery, and you’ll miss out on those big up days. I understand It always feels like its too early to buy and too late to sell during a bear market. Again, timing this is impossible. Now is the time to stick to your game plan.
My goal in showing you this is serve as a reminder that bear markets, just like recessions are a normal part of investing. The reasons are always different, but the painful emotions are always the same. Just remember they do eventually come to an end. For the average investor with say a 50 year long investing career, we can expect to live through about 14 bear markets, give or take. Its important to remember this is a necessary and temporary part of the process. Over the 92 years of market data, bear markets have comprised about 20 of those years.
And by that same logic, its difficult to regret losses when we expect them to happen at some point. If being a long-term buy/hold investor was easy, everyone would do it. And the fact isn’t easy one of the reasons the markets go up over time. To enjoy higher long-term returns, and enjoy the sunshine, we also have to endure the storm. It has to be this way, or the long-term returns wouldn’t exist.
I’ll leave you with this final reminder. If you are investing for one year, there is a ¾ probability the market is positive. If you have a longer time horizon that math moves significantly more in your favor. We can expect more volatility going forward. We can expect the headlines to get worse. But we can also expect this to eventually end. We know that this comes with the territory for long-term investors. Remember we aren’t here to win the battle, we’re here to win the war.
Stay the course, and stay on point.
