Volume 93 No. 7 - July 2022
If you have turned on the news or listened to the radio in the past couple months, you have likely seen or heard about the economy or stock market. Despite the lengthy analyses delivered via teleprompter by our twenty-four-hour news cycles, it’s not all doom and gloom, or fire and brimstone.
The S&P 500 posted its worst first half of the year performance in over 50 years. We understand that the recent pullback in the markets is painful. We also know that market declines have happened before and will happen again.
In mid-June, we officially entered a bear market. There is plenty of negative news circulating about the economy and other factors that do and do not influence the market. This month’s newsletter provides context to the historical significance of bear and bull markets, the current economic and market environment, and how we position portfolios to navigate this environment.
What Is a Bear Market?
Why are they called bull and bear markets? There are multiple theories for the origination of the naming of bull and bear markets. One of the most common theories states the names are derived from the manner in which each attack their prey – bulls thrust upward and bears swipe downward, aptly named for the corresponding move in markets.
The standard definition of a bear market is a 20% or more decline in equity markets from their last all-time high. Since World War II, we have experienced a bear market approximately once every 5.5 years.[1]
For most investors, bear markets are more painful than bull markets are enjoyable. However, stock performance during each is not equal. In a bear market, stocks decline an average of 36%, but in a bull market, stocks rise an average of 114%.[2] The length of each is also unequal. The average bear market lasts just about ten months, compared to the average duration of a bull market, which is about 3.8 years.[3]
The current bear market started when the S&P 500 pushed past that 20% barrier in June, closing 22% below its last all-time (intraday) high set at 4,818.62 on January 4.
All previous bear markets have one thing in common – they all end. The question always becomes, ‘when?’ The longest bear market in modern history came in the early 2000s, following the dot-com boom. It took about two-and-a-half years before the market bottomed out and began to recover. The shortest modern bear market—the 2020 market crash brought on by the onset of the coronavirus pandemic—lasted just over a month, 33 days, before equities returned to growth.
While past results do not predict future performance, if history is a guide, this bear market, and our current economic uncertainties, will also end, just as they have in the past.
How Did We Get Here?
There are several reasons for the current bear market. Almost all can be attributed in some manner to the economic effects of the pandemic which caused increased government spending, a pull forward in demand, and hobbled supply chains. Now, we are facing the effects of this on the economy and markets.
Rising Inflation: The Fed hiked interest rates to tamp down our nation’s high post-pandemic inflation. Inflation reached a forty-year high in June 2022, when prices increased 9.1% year-over-year. Wages are growing too, by 5.2% year-over-year in May, but consumers are still losing purchasing power with the weakening real value of their dollars.[4]
Rising Interest Rates: Every bear market is unique and this one is no different. The Fed’s recent rate hike of 75 basis points (0.75%) in June, was its largest increase since 1994. Higher interest rates typically slow spending by consumers, companies, and institutions alike.
Rising Energy Prices: Energy prices are also rising and may be most noticeable to consumers at the gas pumps with the national average of a gallon of gas reaching $4.80 in early July, up over 50% from $3.13 a year before. High energy costs, a commodity that has many uses, also affect many aspects of the economy.
Rising Global Pressures: Internationally, the war in Ukraine continues into its fifth month and still exerts pressure on the global supply of energy and commodities. The strict measures of China’s ongoing zero-Covid policy, and its lockdowns and border restrictions, have snarled supply chains and slowed demand in the world’s second-largest economy.
These factors have led to lower consumer confidence, slowing demand, and decreased business investment. In addition, the wide range of possible outcomes is difficult for the market to price in, which leads to large price swings in markets which we have seen this year.
We know bear markets are painful. Like death and taxes, bear markets are part of (financial) life. Markets cannot continue to rise without some risk. Occasionally, once every five-and-a-half years or so, that means we face pullbacks that convert into bear markets such as the one we currently face.
Here to Help You Navigate This Bear Market
We are here to help you navigate this bear market. We have been here before and will be here again. Our investment strategy has been tested over time. Prudent and disciplined investment management is critical to delivering the outcomes we want, through all economic cycles.
Through previous bear markets, we have learned the holding of high quality common stocks often prevails over the long term. We focus on companies with strong balance sheets, brand power, pricing power and tested management to navigate difficult times and ultimately prosper. Additionally, quality companies that have strong current cash flows and pay a dividend are positioned to provide current income to your portfolio and dampen volatility.
It is difficult to predict exactly when a bear market will end. For this reason, it is important to maintain target allocations, remain invested, and avoid attempting to time the market. It’s hard to wait, but time helps us come to rational decisions that support long-term buy-and-hold investment strategies. Adopting a buy-and-hold strategy has proven to be a wise choice for many investors and often delivers better results than portfolios that are actively traded.
As always, we are here to listen to, and answer, your questions and concerns about your individual financial objectives. Send an email or call the office, and we will review your portfolio and answer any questions that may arise.
[1] https://www.cnbc.com/2022/06/12/stock-market-news-open-to-close.html [2]https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/CCWP045.pdf [3] https://www.kiplinger.com/investing/600938/bull-markets-10-things-you-must-know#:~:text=The%20average%20bull%20market%20duration,years%2C%20from%202009%20to%202020. [4] https://www.whitehouse.gov/cea/written-materials/2022/06/03/the-employment-situation-in-may-2/
Investment Counsel Inc., a Division of LaFleur & Godfrey, is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.