By Gene Balas, CFA®
Bear markets and corrections happen with some degree of regularity. The causes differ somewhat from time to time, but one trigger has often been geopolitical events that conspired with macroeconomic conditions and commodities prices to spook investors and alarm consumers and businesses, as we have seen recently.
Other times financial market conditions become unsustainably imbalanced – think of the Great Financial Crisis following the housing bubble bursting or the Tech Wreck bear market when dot-com stocks crashed. Sometimes all of these factors play a role, as was the case during the 1990 bear market following the bursting of the commercial real estate bubble and the Savings and Loan Crisis, Iraq’s invasion of Kuwait, and the resultant surge in oil prices, all of which conspired to damage consumer confidence and contribute to the recession in 1990.
But the lesson one might learn from bear markets and corrections is that they do end, and market bottoms historically may have provided buying opportunities. Investors who had the patience to withstand the urge to sell their holdings and go into cash may have been rewarded with an eventual rebound in share prices. Importantly, though, a market rebound may not be a swift, sustained surge. Patience may be needed, depending on the circumstances of each unique market environment.
As a reminder, if one were to try to time the market, you would have to be right not once, but twice – when to get out of the market and when to get back in. And very few investors have successfully been able to foresee the future accurately enough to do this consistently.
Speaking of the present, though, what have been the causes triggering this bear market? Rising inflation, brought on in part by the surge in commodities prices caused by the Russia-Ukraine war is a key factor. Plus, stocks had been expensive already, following the strong bull market since the pandemic lows. And in response to the high inflation, the Fed is likely going to be engaged in a campaign to hike rates to levels we haven’t seen in recent years – though perhaps to levels we had seen routinely in years past. In other words, the end of cheap, if not free, money – and that has been the true aberration to history.
Of course, higher prices on gasoline, food, and housing can crimp consumer spending on everything else. The Bureau of Labor Statistics, which publishes the CPI report as well as the monthly jobs report, reported June 10 that consumers’ real (net of inflation) weekly earnings fell by 3.9% – even with raises they may have received from their employer – and that is not a positive for many stocks.
And certainly, inflation of this magnitude had made the Fed’s most meeting on June 15 especially fraught. Not only are investors, consumers, and businesses concerned about high inflation, but they are also concerned about possibly flagging economic growth as well. Striking the right balance with both monetary policy decisions themselves and the ongoing communications of the Fed’s possible path going forward require threading the needle very carefully. After all, hiking rates too far, or too fast, in order to forcefully combat high inflation could also hinder economic growth more than intended.
Indeed, investors’ concerns are now about both growth and inflation, which is a troubling combination for risk-asset investors and stock market valuations. This mix of concerns has not been seen since the early 1980s. (Some may also point to 1994 as a time when a more-active Fed drove up bond yields and sent share prices lower for the year due to inflation at the time.)
In the end, however, bear markets such as this can be expected from time to time, especially during periods of geopolitical strife, high commodity prices, and declining consumer sentiment, as is the case now.
Currently, consumers’ and corporations’ balance sheets are in great shape, with near-record low unemployment. There are also no obvious signs of distress or imbalances in the economy or financial markets now, as there were during the 1990 recession.
While there are always concerns, there are also positives as well. Looking back, 1991 turned out to be a great year for the markets, as geopolitical concerns were resolved, and the economy rebounded. Patient investors were rewarded then by a boom in share prices, as was also the case in 2009, when the Great Financial Crisis ended, or more recently, witnessing the surge in stocks following the pandemic-related bear market and recession. Every situation is unique, however, and we can never expect any events now or in the future to follow a historical playbook.
Instead, focus on how you may achieve your financial goals and investment objectives consistent with your time horizon and risk tolerance. Chances are, if you were appropriately invested before the bear market, you might still be today. If you do need to revisit your portfolio strategy – or if you want to address any questions or concerns that you may have – definitely speak to your financial advisor. Our mission is, as always, to help you succeed – in every environment.
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