Stocks Enter Bear Market - Here's What Investors Should Do Next
-Article from Zacks Investment Management
U.S. stocks entered a technical bear market this week, with the S&P 500 index declining more than -20% from its January peak. The downdraft has been led by technology shares, which disproportionately impact the broad index’s returns since technology is the largest sector by market capitalization. As of this writing, tech shares are down over -30% from their peak (1).
It’s also true, however, that technology shares remain over +20% higher than they were pre-pandemic, which signals the market is simply repricing some of the exorbitant gains posted in the second half of 2020 and throughout 2021. Remember, too, that U.S. stocks soared more than +100% from the Covid-19 bear market lows, which means this current retracement of -20%—while unpleasant and unwelcomed—does not make equity investors any worse off than they were two years ago. In fact, U.S. household net worth is still hovering around all-time highs, thanks in large part to +20% gains in home equity over the past year (2).
My advice to investors now is not to get drawn into the fear narratives that always accompany sharp stock market declines. In my four-plus decade career, every bear market I’ve seen has been accompanied by a sense of dread that the U.S. economy now faces an existential problem that will persist for many years. This time around the problem is inflation, which many believe can only get worse. There is also a seemingly widely-held belief that the U.S. economy is already in freefall, which has driven pessimism to extremes.
Case in point: last week’s University of Michigan Consumer Sentiment Survey found that Americans are more dissatisfied with the economy today than they were in the depths of the 2008 Global Financial Crisis. The unemployment rate climbed to 10% during that time and almost 10 million Americans lost their homes. Today, there are more available jobs than there are unemployed people, and discretionary spending remains relatively strong. Spending on everything from airline tickets, to hotel stays, to restaurants has been going up, which is the type of activity you’d expect to see in good times – not dreadful ones.
We’re seeing this same disconnect in the small business space, a key engine of growth for the U.S. economy. Normally, small business sentiment about the economy is tightly correlated with hiring plans – optimistic small business owners make plans to hire more workers, and vice versa. But today the opposite is true. Small businesses are reporting low levels of optimism about the economy, but at the same time, they’re trying to bring on more workers.
This leads me to believe we are experiencing a recession-less, sentiment-driven bear market that is not likely to resemble the big, fundamentally-driven bear markets of 2000 and 2008. We’ve seen this outcome many times throughout history. There have been 26 bear markets since 1929, but only 15 of them were tied to a recession. Zacks is still estimating over 2% GDP growth for the U.S. this year.
As I have written many times before, I am not proclaiming the U.S. economy to be in perfect shape with all concerns and fears being unwarranted. I am simply highlighting that current sentiment reflects an economy that is mired in recession, when in fact jobs are plentiful, profit margins are high, and fundamental indicators like services PMI and consumer spending are signaling growth. The wider the gap between how investors and consumers feel relative to how the economy is performing, the closer I think we get to see a market low.
The table below shows how the S&P 500 has historically responded in the months and years after closing in a bear market. While we cannot know whether or for how long the bear market will continue, we do know that periods of weak returns have almost always been followed by periods of strong returns.
As for what investors should do now, my answer is not to panic and to stick to your plan. Trying to time the bottom of a bear market is hazardous and ripe for making a serious misstep, so I strongly caution against attempting to do so. About a third of the stock market’s best days have happened within the first two months of a bull market, which we will only be able to confirm with the benefit of hindsight. The biggest risk now, in my view, is being on the sidelines when that happens.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
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1. Wall Street Journal. June 14, 2022. https://www.wsj.com/articles/bull-markets-winners-dragged-the-s-p-500-into-a-bear-market-11655184522?mod=hp_lead_pos7
2. Hartford Funds. 2022. https://www.hartfordfunds.com/practice-management/client-conversations/bear-markets.html#:~:text=Watch%20for%2020%25 %3A%20Market,of%2010%25%2D19.9%25