Bear Encounter
When going on a hike in the woods, we expect to see some wildlife, and we may even encounter a bear—perhaps the most feared encounter. Experienced hikers make a plan before they set out; they pack bear spray and a first-aid kit. They understand that black and brown bears have different attack styles and sensitivities. While on the trail, hikers make noise to avoid surprising animals and safely store food in sealed containers between preparations.
Shifting to bear markets and investing. The U.S. stock market entered a bear market in the second quarter of 2022. Bear markets are often defined by a broad stock market decline of 20% or more, and last for an extended period. The S&P 500 hit -20% on June 13th before finishing the first half of the year down -19.96 percent. International stocks fared slightly better, down -18.42 percent. In addition, market interest rates increased during the quarter (and year), ushering the broad bond market to a price decline of -10.35% for the year.
If this quarter's price decline seems unusual, it's because it is. During the last 40 years, a bear market has occurred just seven times. Relatively rare for those keeping an encounter tally. Importantly, each substantial decline during the past 40 years has been marked by varying magnitudes and duration.
Historically, once a bear market decline does occur, the subsequent recovery has begun 34 days (median) to 129 days (average) thereafter. This significant difference—34 days vs. 129 days—is mainly due to whether the economy is in a recession. Bear markets that coincide with an economic recession have historically tended to be longer lasting. There has, however, been relatively little difference in the total percent decline between a bear market with an economic recession versus without.
Price inflation has continued to move higher, recently hitting 9.1% year-over-year. Energy, food, and shelter have been the most significant contributors. The U.S. Federal Reserve (Fed) increased short-term interest rates in Q2, effectively increasing the cost of new borrowing with the intent of reducing inflation levels. The Fed reportedly aims to cool inflation without triggering a recession. We expect the Fed will continue increasing short-term interest rates in July and September.
The uncertainty that comes with a bear (market) encounter is why we plan ahead. Using a bucket-based approach to planning and investing, we set aside dollars for near-term income needs in more stable investments to help manage uncertainty.
Running from a startled bear in a down market gives way to chase and exhaustion. So instead, we exercise patience and look for opportunities to position for recovery, i.e., rebalancing, tax-loss swapping, and focus on investment valuations, specifically in the longer-term portfolio segments.
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