A bear market describes a very unpleasant situation during which stock prices decline over a painfully long period of time. According to the pundits, a “Secular Bear Market” is measured in years – not days, weeks or months. A “cyclical bear market” is much shorter.
While the long term trend of the market is up, bear markets rear their ugly heads periodically. And when they do, they are costly and agonizing. By definition, whenever the index drops by 20% or more, it’s described as a bear market. But it can be a lot worse.
During the granddaddy of all bear markets, the Great Depression of the 1930s, the market dropped 90%. Aye Chihuahua!
How To Spot A Bear Before It Claws You To Pieces
Historically the market does poorly in anticipation of a weakening economy. So if GDP is slowing and inflation and unemployment are going up a bear might be coming your way. If you watch these numbers over several quarters and see things going in the wrong direction, it could mean big trouble ahead. Bear markets rarely happen as a result of one specific event but occur as a result of general and widespread weakening economy.
Are you puzzled by what to do with your investments right now? Feel free to ask me your questions. I’ll be glad to help if I can.
The Problem – Bears Wear Camouflage
Bear markets are easy to spot in hindsight but exceptionally tricky to identify real time. Remember, when some stock market genius tells you we are currently in a bear market, that’s just his or her opinion. Let’s look at a few examples to illustrate.
Here’s a chart of the S&P 500 courtesy of Yahoo! Finance. It depicts market performance from 2007 through 2009.
The economy wasn’t just slowing at that time – it stopped. GDP turned negative in 2007 and 2008 and we lost 9 million jobs during that period. Although inflation wasn’t a problem, the United States clearly was in a steep and harsh recession.* The market lost more than 50% almost overnight. But we’re we in a bear market? Take a look at the next chart and you tell me.
As you can see, when the situation was most bleak, the market started doing really well. Had you concluded that we were indeed in a bear market in 2008, you might have taken your marbles and gone home. Of course, that would have been a huge mistake. The market did nothing but make money for investors over the following 4 years.
That shows you the real danger in declaring a bear (or bull for that matter). Again, you can absolutely describe a historical situation with these terms but you can’t possibly do so while you are in the thick of it.
What You Should Do About Bear Markets
In my opinion, you should not alter your investment approach just because somebody tells you we are in a bear market. If you are a buy and hold investor (which I do not recommend), you should probably hold on. If you reallocate your assets and reposition them based on market strength and weakness (which I do recommend) you will already be actively repositioning your investments long before the pundits make a bear declaration.
The bottom line is that bear markets describe the past and don’t tell you anything about what lies ahead. Rely on a good investment system and stick with it rather than shift all your assets around when a bear or bull market is declared.
Do you change your investments when the experts announce a bear market? Why or why not?