What to make of stocks entering bear-market territory

Investors with a 50-year investment horizon will live
through, if history is any guide, 14 bear markets over the course of their
investing lives.1 That’s a bear market once every 3.57 years.2
History would also suggest that during those bear markets, investors should
expect their equity portfolio to lose, on average, 32% (median 28.8%).3
It’s almost enough to make investors wonder why they put money in equities at
all. Yet, stocks, as represented by the S&P 500 Index, returned, on
average, 10.5% per year over the past 50 years.4 That’s a doubling
of their investments, on average, every 6.9 years, notwithstanding all the bear

Much is being made of the S&P 500 Index entering bear-market
territory on Wednesday — defined as a 20% drop from a recent market high. It
was the first time US stocks had done so in 11 years. Many were quick to
declare, “the longest market cycle on record is over.” Technically that may be
true, but it is also largely semantics. Even this record cycle experienced
significant drawdowns. There were the near 20% drawdowns of 2011 (during the European
debt crisis and US government credit downgrade) and 2018 (in response to the US-China
trade war and US Federal Reserve interest rate hikes). That history can’t be
ignored. Even 2016’s 15% market drawdown (in reaction to the Chinese currency
devaluation and Fed interest rate hike) felt particularly harrowing at the
time. Nonetheless, the US equity market is up nearly 350% since March 2009 (as
of March 11, 2020).6

These facts may be of cold comfort to investors and financial
professionals who are contending with the uncertainties of the coronavirus
outbreak and struggling to comprehend the potential loss in economic activity
and corporate earnings in the coming weeks. Candidly, we are all grappling with
these issues together. At times like these, there is a tendency to focus on
what we want now, instead of what we want most. For many of us, what we want
now is safety for our loved ones and for our investment portfolios. Still, what
we want most is long-term financial security. We know that equities, more than
any other asset class, have historically been the greatest wealth compounder.
Therein lies the rub.

Timing the market is nearly impossible

It’s important to use historical facts to overcome
emotion.  Most investors, by now, have
seen the research demonstrating that missing the best 10 days in the market
over a 20-year period would cut their returns in half while missing the best 30
days would actually lead to negative long-term cumulative return.7  Alas, most promoters of that research fail to
communicate the most important points: 1) Fully half of the market’s best days
in history have happened during bear markets and, 2) Another 30% of the market’s
best days have happened in the first two months of a recovery.8  In short, timing the market is often a fool’s
errand, particularly during the depths of extreme pessimism. 

Finally, I’ll conclude (for the
second time this week) by reminding investors of the 20-year period from 1998
to 2018, a period which included the tech wreck, the Sep. 11 terror attack, the
global financial crisis, the European debt crisis, Brexit, and many infectious
disease scares (H1N1, SARS, Ebola, and MERS) and the S&P 500 Index still
climbed 7% per year.9 A $100,000 investment in the market in 1998
would today be worth over $400,000.10

We will get through this by
applying the same key principles we in have each of the other crises and bear
markets of our multi-year investment horizons: think long term and stay the

  1. Source:
    Standard & Poor’s as of March 11, 2020
  2. Source:
    Standard & Poor’s as of March 11, 2020
  3. Sources:
    Bloomberg, L.P., Standard & Poor’s as of March 11, 2020
  4. Source:
    Bloomberg, L.P. as of March 11, 2020
  5. Source:
    Bloomberg, L.P. as of March 11, 2020
  6. Source:
    Bloomberg, L.P., the market as represented by the S&P 500 Index, as of March
    11, 2020
  7. Source:
    Bloomberg, L.P., Standard & Poor’s, as of Dec. 31, 2019
  8. Source:
    Bloomberg, L.P., Standard & Poor’s, as of Dec. 31, 2019
  9. Source:
    Bloomberg, L.P. as of Dec. 31, 2018
  10. Source:
    Bloomberg, L.P. as of March 11, 2020

performance is no guarantee of future results.


Blog header image: ACALU STUDIO /

The S&P 500 is a stock market
index that measures the stock performance of 500 large companies listed on
stock exchanges in the United States. It is not possible to invest
directly in an index.

The opinions referenced above are
those of the authors as of March 12, 2020. These comments should
not be construed as recommendations, but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.

This does not constitute a recommendation of any investment
strategy or product for a particular investor. Investors should consult a
financial advisor/financial consultant before making any investment decisions.

%d bloggers like this: