Bear markets and recessions happen more often than you think

Spending money can be fun. But lose it? If you see big chunks of hard-earned savings disappear, losing money can be sheer misery.

This is why the headlines announcing the arrival of a bear market are so worrying. Strictly speaking, a bear market is simply Wall Street lingo for a stock market decline of at least 20%. But it’s not just a question of numbers. The technical meaning of the term does not convey the full human experience.

Really, the fact that we’re in a bear market means a lot of people have already lost a ton of money. Until the momentum changes, as it will eventually, much more wealth will be lost. Panic only makes things worse. For those experiencing huge losses for the first time, a bear market can be the shattered of dreams, a time of pain and heartache.

However, far bigger issues could arise for the millions of people who have never been able to set aside enough money to lose it in the stock market. A recession could well be on its way. The United States has been in a recession 14% of the time since World War II, according to data provided by the National Bureau of Economic Research, the quasi-official entity that reports when recessions start and end in the United States. .

With the Federal Reserve raising the key federal funds rate by 0.75 percentage points on Wednesday and slated for further increases to combat runaway inflation, we could certainly be heading for another recession. The Fed is also cutting bonds and other securities it has amassed on its $9 trillion balance sheet to support the economy. In a reversal of policy, it is now engaged in “quantitative tightening”, which will contribute to an economic slowdown.

Like bear markets, recessions have a dry, technical definition. A recession is “a significant decline in economic activity that extends across the economy and lasts for more than a few months,” according to the Bureau of Economic Research.

But, fundamentally, a recession comes down to this for millions of people, many of whom are completely indifferent to the vagaries of the stock and bond markets: hard workers will lose their jobs, millions of families will run out of money, and countless people suffer setbacks to their physical and mental health.

It’s a sinister thing. If I could design a world that eliminates the misery of bear markets and recessions, of course I would.

But don’t wait for that to happen. The best we can do now is recognize that bear markets and their much more troubling cousins, recessions, are not rare or genuinely unexpected events, although the relative calm of the past decade may lead us to believe that this is so.

Despite the best efforts of policymakers, history shows that bear markets and recessions are about as common as violent storms in New York. Learn to live with them, just like you do with bad weather.

Stocks don’t always go up. The risk is always present.

It may seem like a trivial idea, but it’s never fully understood until market declines hurt, only to be ignored or forgotten in the next boom.

Try to take only the risk you can tolerate. Long ago, I stopped investing in individual stocks and bonds, eliminating the risk of owning the wrong stock at the wrong time. Instead, I favor low-cost, diversified index funds that allow me to own a share of the entire global stock and bond market. And I reduced my equity exposure as I got older and increased my bond holdings. Bonds haven’t performed well lately, but Treasuries and high-quality corporate bonds are still much more stable than the stock market.

Before investing, try to set aside enough money to survive an emergency and keep it in a safe place. If you’ve ever managed to hoard some cash, I’ve outlined some sensible places to keep it, especially in this time of severe inflation.

They include I bonds, which are issued by the Treasury Department and pay 9.62% interest. (The rate resets every six months.) Additionally, money market funds are starting to pay higher interest after months of near zero lock-in. High-yield bank accounts, short-term Treasury securities, and even some corporate bonds are also options.

Then, when it comes to investing, try to think very long term, meaning at least a decade and preferably much longer than that. I wouldn’t put money into the stock market that you’ll probably have to spend soon.

In the past, after sharp declines, the stock market has always come back. Over 10-year periods, if you had put money into the entire S&P 500, you would have lost money only 6% of the time. Over periods of 20 years, you would never have lost any money.

Above all, be prepared for market fluctuations. It’s clear right now that they don’t always get up. In fact, history shows that steep declines are an integral part of investing.

Bull markets are much nicer than bear markets, and they are overwhelmingly the predominant experience of people who started investing after March 9, 2009.

It was the day the S&P 500 bottomed after a 57% decline in the bear market. This terrible fall happened during the financial crisis that began in 2007. What turned the market around was the Federal Reserve, which cut interest rates to near zero, bought billions of dollars bonds and launched a bull market in equities that lasted almost 11 years. .

This glorious period for the S&P 500 ended on February 19, 2020, around the start of the Covid-19 pandemic. There was a brief bear market until the Fed intervened again, and on March 23, just a month later, another bull market began that lasted nearly two years.

If that’s all you know, this year’s bear market may seem like a rare aberration, a random downturn in a world where market gains are the norm.

But I think that would be a serious misreading of history. Data provided by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, offers a broader perspective.

Since 1929, the US stock market has been in a bear market nearly 24% of the time. Note that in this authoritative accounting, a bear market begins on the first day of dips that become 20% downdrafts. According to the S&P indices, the S&P 500 has been in a bear market since January 3, when the decline began.

You can quibble with this definition of a bear market, but the main point is irrefutable: deep market declines have always been an integral part of investing, and if you want to invest your money in stocks, you need to be prepared for that.

We are in a bear market. We may be in a recession right now, but the Bureau of Economic Research isn’t even trying to make real-time recession calls.

In the past, he has declared recessions to start and end somewhere “between four and 21 months” after these events occur. As the office explains, “There is no fixed time rule. We wait long enough that the existence of a peak or trough is not in doubt, and until we can assign a specific peak or trough date.

Economists are great at many things, but predicting recessions is not one of them. “Recessions are very difficult to predict,” said Ellen Gaske, chief economist at PGIM Fixed Income, in an interview Tuesday. “Even if you get a good one, chances are you won’t get the next one.”

But we have accurate readings on the dates of past recessions dating back to 1854. Using data from the bureau’s website, I did some calculations, with the help of Salil Mehta, a statistician. I found that since 1854, the United States has been in a recession 29% of the time. From 1945 to 2020, it was in recession only 14% of the time.

But consider this finding, derived from the data and produced by Mr. Mehta: on any given day after the war, the probability that the United States was in recession or would be within two years was 46%.

What does this tell us about the chances of the United States falling into a recession fairly quickly? Not much, except the odds are still reasonably high, and it’s wise to be prepared.

That said, my own fallible assessment is that it would be a welcome surprise if we don’t have a recession. Sharply rising interest rates, soaring energy prices and sharply falling stock prices have often been associated with recessions.

But even if none of these factors turn out to be important, it is still relevant that recessions occur with shocking frequency. The Federal Reserve has tried to smooth the economic cycle, but the “great moderation”, a term popularized in 2004 by Ben S. Bernanke, the former chairman of the Fed, is conspicuous by its absence.

Turmoil is a constant recurrence in markets and the economy. It’s easy to see when financial and economic disruptions are commonplace but will undoubtedly be forgotten again. It’s like that.

Likewise, these difficult times will not last. Knowing that may not help you much if you are already in pain.

But if the future looks a bit like the past, chances are the economy will grow in the long run and the financial markets will produce good returns for patient and diversified investors. Understanding that even severe slowdowns are an inevitable part of life can even help you avoid some pain later on.

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