As I write this, traders and the financial media are gasping for a magic number for the S&P 500: 3,837.25. This is the level below which the broad US index must close to technically qualify as a bear market, down 20% from the recent high.
Prior to this year’s sell-off, there have been 14 bear markets since 1945 (and 3 more that have been damn close). During those losing streaks, stocks lost an average of 36% over 289 days, or about 9.6 months, according to data from Hartford Funds. If that sounds awful, here’s better news: the average duration of a bull market is 991 days or 2.7 years.
If you’re a newbie to all of this — and research shows a whole bunch of Americans have started investing with 2020 and 2021 stimulus checks burning a hole in their pockets — you might be wondering s There’s someone behind the curtain, who knows when the markets are going to start a long climb and when they’re falling out of bed. Sorry to report that there is no Great Oz, either in fiction or in investing.
Yes, it would be nice to know the beginning or end of a bull and bear market. It is usually impossible to judge when to leave and when to return. Or in trader parlance “nobody rings a bell up or down!”
That’s why it’s probably best to stick to your diversified portfolio and not overdo it. Hartford’s analysis found that “34% of the best market days occurred in the first two months of a bull market – before it was clear a bull market had started.” In other words, if you think you can time the market, well… you can’t.
While the stock market is often considered a leading indicator of the economy, it’s not the only measure. When the S&P 500 enters a bear market, it may not indicate that a recession is built into the cake. Or as legendary economist Paul Samuelson said, “The stock market has predicted nine of the last five recessions,” meaning that just because the market is falling doesn’t necessarily mean we’re going into a recession.
That said, recessions are an integral part of the business cycle – we’ve had 13 since World War II. Sometimes the contraction and subsequent recovery lasts a long time (the Great Recession) and sometimes the damage is deep, but the duration is short (the COVID Recession).
The big problem with recessions is that they can lead to job losses, stagnant wages and human suffering, which would leave many workers in dire straits, especially as prices remain high.
If you’re thinking about what to do amid market chaos, try to refrain from gambling with your investments or allocation unless you need your money within the next 12 months. Instead, channel your energy and think about these measures that could protect you from the worst aspects of an economic downturn or recession:
(1) Fund an emergency reserve that can cover 6-12 months of your living expenses. Keep this money in an accessible savings, checking or money market account.
(2) Reduce credit card debt or other high interest debt
(3) Fund pension plans to the best of your ability, especially if you are entitled to company consideration.
(4) Create a “break the glass” plan, which should be easy, especially after the pandemic. Itemize the money you need to spend over the next 3 months, which usually includes food, housing, utilities, health insurance/medication.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at email@example.com. Check out his website at www.jillonmoney.com.