Broker Check

What is a "Bear Market"?

May 25, 2022

Markets have had a rough go of it in 2022. After declines earlier in the year and a partial recovery in March, equity markets resumed the declines, recently hitting new lows for the year. In fact, as of last week, the DJIA registered the eighth consecutive weekly decline.1 Adding to the disappointment, the S&P 500 has been flirting with a bear market decline.2 We are here to help. We do not just manage money. We understand that there are people attached to the assets we oversee.

What is a “bear market” and what does it mean?

It means that a particular market has declined 20% from recent highs. The 20% point is purely arbitrary. It was probably settled on merely because it is a relatively large and round number. It is also somewhat inexact. Most only count a bear market as of the close of the market, but this is not universal.

Like many disappointments we occasionally encounter in life, market declines are not uncommon. Since 1928, the S&P 500 has experienced 26 bear markets.  On average, one occurs approximately every three and a half years. More recent times show similar results. The last bear market, a 34% decline, occurred just over two years ago. 2018 was also a rough market, with the S&P 500 dropping within a whisker of a 20% closing decline and then recovering. 

What “bear market” does not mean

The term is in no way predictive. When significant market declines occur, the financial news media goes into a frenzied state. A headline one might see is, “Markets Enter Bear Territory.” This can be very misleading. It seems to imply that equity investors have suddenly crossed into dangerous waters and risk has materially increased. Not necessarily. It means that equities have already experienced a significant decline. That’s it. We know that risk is another calculation altogether.

In all the disruption of market declines, bear markets and recessions are sometimes used interchangeably. This is incorrect. A recession is a general decline in a country’s production that lasts two consecutive quarters. While the two are somewhat related to economic growth, they do not move in lockstep. Since the Great Depression, only half of bear markets were accompanied by recessions. But that does not stop people from trying to link market declines to recessions.  In 1966, Nobel Prize winning economist, Paul Samuelson quipped that the stock market had predicted nine of the past five recessions.  

Bond prices have declined. That could be a good thing.

Investors thought bonds were their friends during market declines. Not this time. Investors have historically benefited by including bonds in their portfolios. Bonds have provided positive returns in all but four years since 1976. Bond yields have generally been falling and prices rising for 40 years. That changed in 2022, with investors seeing losses rather than the gains they had grown accustomed to, particularly during stock market declines.3

There is a bright side to the rise of rates. As bond yields marched ever lower over the years, reasonable yields were increasingly difficult to find. Investors found money markets and CDs yielding near zero. Longer fixed-income options were not much better.     

Rather than hazy predictions, we again turn to the math. Over the long-term, most of the return one gets from bonds, 90% in fact, comes from the interest rate at which they buy.3 Along with the pain of the year-to-date loss comes a positive. While there are no guarantees, the rise in yields indicates the possibility of more reasonable fixed-income returns in the future.

We are ready

Significant market declines are painful and unsettling. They are also inevitable if one seeks equity-like returns. However, we can prepare, and we have. All those questions we ask, the math, and withdrawal calculations we do are part of that preparation. Preparation and having a plan are big parts of our process but they aren’t everything. Controversial professional boxer, Mike Tyson, was reported to have said, “everyone has a plan until they get punched in the mouth.”

While we have not been here before, we have seen similar market conditions many times. Despite the impact of recent volatility, we will continue to plan, adjust, and execute. Getting through market declines isn’t easy. It takes patience, discipline, restraint, and a lot of listening. We are here and ready.

 

CRN-4758996-052422      

[1]The Dow Jones Industrial Average is an unmanaged index comprised of 30 top industrial companies and is considered representative of the general state of the stock market. It is not available for direct investment

2S&P 500 Index is considered a reflection of the large capitalization U.S. stock market.  It is the benchmark against which judging the overall performance of money management is used.

3The Wall Street Journal

Any forward-looking statements made are subject to certain risks and uncertainties.  Actual results, performance, or achievements may differ materially from those expressed or implied. An index is unmanaged, and one cannot invest directly in an index.