Stock Market Insights: Bear market...for now

BY DR. RICHARD L. BAKER, AIF® Founder & Senior Wealth Advisor at Steadfast Wealth Management

You’re entering Bear Country! The bear was my high school mascot. We had a big bear painted on the side of our gym (though it was a little controversial) and a sign on the road telling drivers passing through that they had entered “Bear Country.” I’m sorry to tell you our stock market has entered bear country, too, but I think we may be exiting it soon.

Bulls and bears are stock-market lingo that gets tossed around a lot in media. Growing up in the country makes it easy for me to understand. Just like real bulls produce valuable calves and real bears take away valuable calves. A Bull Market is where increase/gain occurs, and a Bear Market is where decrease/loss happens. A market is technically a Bear Market when the indexes fall 20% or more from their highs for at least 60-days.

Our current bear market started on Jan. 3 when the S&P 500 Index hit a high. It’s five and a half months old, which makes it older than six out of eight other bear markets in the last forty years.

When this bear market ends depends on how inflation is handled. We need three things to happen: First, we need the Federal Reserve to gently slow the economy to bring down inflation. Second, we need nothing significant to happen such as a major terrorist attack or a big bank failing (which I don’t expect.) Lastly, we need to avoid a recession. If these three things happen this bear market may bottom soon or might have already.

I don’t see a recession this year, but there might be one next year. Since 1948, eight of 11 bear markets have been followed by recessions according to CenterPoint Securities. Although we don’t stop investing during down markets.

I remember talking to a cattle farmer when the beef prices were low. I asked him how he did it, and he told me he couldn’t just shut down his farm every time prices dropped. He had a plan and stuck to it. His plan during low prices was not to sell any calves and use any extra cash he had to buy more yearlings because he knew beef prices always rebound and he wanted to be in a good position when they did.

The S&P 500 Index is down about 21% for the year and if it stays that way until the 30th, it would be the worst first half of the year since 1970. The good news is that every time in history it’s been down 15% or more at midyear, the final six months ended higher with an average return of nearly 24% according to LPL.

Just like the farmer said, the market can rebound, and we need to be in a good position when it does. I’m usually a “Go Bears” kind of guy but not now. I haven’t said “Go Bulls” since Michael Jordan retired but I will now.