Now It's Official
On July 9th, the last holdout of the major stock market indexes - The S&P 500 - passed into "Bear Market" territory. On July 15th, the S&P 500 inched lower still and closed at 1215. As of this writing, this marks the bottom, a 22.4% decline from its all-time high of 1565 on October 9th, 2007.
Some observations:
- This is the 10th bear market in the last 50 years. On average, it happens once every five years. It should be expected. In a person's investing lifetime - a period from the time they are in their twenties until they are into their eighties - they will likely experience twelve such events.
- The average decline of 10 bear markets since 1957 has been 31%. The mean decline is 25% (the "big uglies" of 1973-74 and 2000-02 skew the average lower).
- The previous nine bear markets have recovered 100% of the declines sustained. The average time it took for the recovery was 23 months.
- The average annual rate of return of the S&P 500 over the last 50 years is 11%.
Fighting the Impulse
Considering the hysterical deathwatch of the market in the financial media, it is certainly understandable why any of us would be absolutely terrified and have the impulse to sell all of our equity positions. We firmly believe acting on this impulse is one of the biggest mistakes you can make.
The biggest financial risk we all face is the continual, slow, silent erosion of our purchasing power due to inflation. Throughout time, the asset class which has enabled people to earn rates of return which outpace inflation is equities. We need equities for our long-term financial survival. Even if you were to sell your equity positions now, you would still need to buy them again at some point in the future or you risk not achieving your most cherished goals.
- If this bear market behaves like the more typical bear markets we have experienced in the last fifty years (a 25% decline in stock prices), we have already lost 85% of what we are going to lose (as of July 28th). Isn't it too late to sell, unless, of course, you are betting that this time is going to be really ugly?
- If the market continues lower, will you honestly be less afraid of further declines than you are right now? Nobody rings a bell at the bottom and cries, "The storm is over, everybody back in the pool!" If the market continues lower, the mood will be worse, and more than likely, you will be even more afraid of stocks then than you are right now. By the time the mood changes, the bulls will be well into their run and you will have missed a significant part of the recovery.
- If you sell out of stocks, where do you put your money? Bonds are about to be lead to slaughter as interest rates will inevitably rise in the near future. Other perceived "safe" investments are losing money in real terms. A CD paying 3.5%, with historical inflation at or around 3.5%, is earning nothing, and since current inflation is a bit higher right now...
What You Won't Hear on CNBC
Please be patient with the redundancy, but it is worth it to make the point.
In the last fifty years, there have been ten bear markets - the average decline being 31% - and the stock market generated an average annual return of 11%.
In those fifty years we have seen a variety of economic events (including two prolonged bear markets where stocks were reduced in value by approximately half), natural disasters, terrorist attacks, wars, recessions, inflation, two "energy crisis" events, bank failures, you name it. Equities still gave investors the opportunity to earn 11% per year.
You can't help but be afraid of what may happen. We are inundated with negativity. You can't help but feel the impulse to sell. But if you act on your impulse without a sound strategy to get back in, likely at a period where you will be even more fearful, you are far better off to do nothing at all. Have faith that stocks will continue to act like stocks always have by giving investors the opportunities to earn rates of return which will significantly outpace inflation over time.
A Special Note for Accumulators: You may never find a better opportunity to buy stocks than right now. It is a possibility equities could go lower in the near future. However, ten years from now, we will look back on today and wish we could have invested every cent we could in equities. When the news turns from bad to good, it will be after stocks have already significantly increased in price.
The S&P 500 is an unmanaged index of 500 stocks. An investment cannot be made directly in an index. Past performance does not guarantee future results.
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email: nwatson@maplewoodinvestments.com
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