This 3rd Week of January 2022 Thoughts
Updated: Sep 23, 2022
For far too long everyone thought the market was easy peasy. It isn't. It never was. So, if you think just because one indicator did this or that it meant buy, then you are in for a rude awakening. It's simply not that easy. Helene Meisler, Macro Maven, TheStreet.com This chart puts this market that would not stop going up into perspective since the pandemic began. Bored; home-bound and nothing to do but trade: monthly net purchases of U.S. stocks went from $4 billion to $22 billion!
Clients know I believe that money needed in the next 2-3 years should stay in cash, or low-volatility bonds. A new report from Dalbar, however, says your asset allocations should be based on cash needs for five years because since 1940, five years was the longest it took for the S&P to recover losses from a downturn.
Dalbar differentiates between Arbitrary Asset Allocation (AAA): it omits any consideration of cash needs, and Prudent Asset Allocation (PAA): which uses five-year cash flow needs. AAA allocations change based on risk tolerance, passage of time, or best practices. PAA allocations, are based on the cash needs of an investor and on the market’s historical ability to recover from severe declines.
Based on this, you should keep what you plan to spend over the next 5 years in cash and everything else can go into stocks. (NOTE: Included in this calculation is Social Security, savings, and any salaries.) Frankly, I do not think many people can take the volatility this stock allocation will deliver, do you? Today is a good day to ponder this question: how would YOU feel, after the first 3 trading weeks of 2022, to have more than 50% of your portfolio in stocks?
How Often Should You Expect a Stock Market Correction? Since 1950, the S&P 500 has had an average draw-down of 13.6% over the course of a calendar year…on average…EVERY YEAR!!! Over this 72-year period, there have been 36 double-digit corrections, 10 bear markets and 6 crashes. This means the S&P 500 has experienced on average, a correction once every 2 years (a 10%+ loss) a bear market once every 7 years (20%+ loss), a crash once every 12 years (30%+ loss) Hartford Funds put together this list of
“10 Things You Need to Know About a Bear Market” to help you know what to expect.
1. Watch for 20%: Market cycles are measured from peak to trough, so a stock index officially reaches bear territory when the closing price drops at least 20% from its most recent high (whereas a correction is a drop of 10%-19.9%). A new bull market begins when the closing price gains 20% from its low.
2. Stocks lose 36% on average in a bear market.1 By contrast, stocks gain 114% on average during a bull market.
3. Bear markets are normal. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets—and stocks have risen significantly over the long term.
4. Bear markets tend to be short-lived. The average length of a bear market is 289 days, or about 9.6 months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.
5. Every 3.6 years: That’s the long-term average frequency between bear markets. Though many consider the bull market that ended in 2020 to be the longest on record, the bull that ran from December 1987 until the dot-com crash in March 2000 is technically the longest (a drop of 19.9% in 1990 nearly derailed that bull, but just missed the bear threshold).
6. Bear markets have been less frequent since World War II. Between 1928 and 1945 there were 12 bear markets, or one about every 1.4 years. Since 1945, there have been 14—one about every 5.4 years.
7. Half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun.2 In other words, the best way to weather a downturn could be to stay invested since it’s difficult to time the market’s recovery.
8. A bear market doesn’t necessarily indicate an economic recession. There have been 26 bear markets since 1929, but only 15 recessions during that time.3 Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming.
9. Assuming a 50-year investment horizon, you can expect to live through about 14 bear markets, give or take. Although it can be difficult to watch your portfolio dip with the market, it’s important to keep in mind that downturns have always been a temporary part of the process.
10. Bear markets can be painful, but overall, markets are positive a majority of the time. Of the last 92 years of market history, bear markets have comprised only about 20.6 of those years. Put another way, stocks have been on the rise 78% of the time.
😲 Why does this matter to you? So many of you have been with me for years…decades, even 30+ years. I have been preparing you for this eventuality since my “9th Inning Investing Series” back in the fall of 2019. So, now, it seems, here we are. We don’t know how long this volatility will last…or how long it will take for interest rates to get to a level that helps fund your financial goals. But, in the end, it will be over. Check out this walk down a bear-market lane.
Required Disclosures: Always read the fine print! This content reflects the opinions of Julie Skye and is subject to change without notice and is informational and entertainment purposes. It is not a recommendation regarding the purchase or sale of any security. There is no guarantee that any statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance any investment plan or strategy will be successful.
Julie is an Investment Advisor Representative of Sustainable Advisors Alliance, LLC (SAA, LLC): Advisory services are provided by SAA, LLC.
Registration with the SEC does not imply a certain level of skill or training.