Lessons In A Bear Market


By: Spencer Israel

When the dust eventually clears and the world begins to move on from its current pandemic-induced state of panic and fear, market historians will look back at March 11, 2020, as one of the most significant dates of this entire crisis.

That was the day that the first of the large cap U.S. indices fell 20%, officially hitting the threshold for a bear market.

It was a watershed moment. By the following morning, the Dow Jones Industrial Average, S&P 500, and Nasdaq 100 had all fallen more than 20% from their all-time highs, marking their biggest declines since the financial crisis in 2008. Small-caps have been even weaker, with the Russell 2000 Index crossing the bear market threshold on March 9.

So ended the longest bull market in history. (Though, depending on the index, the end of 2018 could have also marked the end of the bull market. But unlike then, an immediate bounce back does not seem likely.)

According to Dow Jones Market Data, the average bear market causes the S&P 500 to fall 36% and lasts for about seven months. If that were to be the case now, it would mean the S&P 500 would reach 2200 in September—in other words, another 19.7% drop from Wednesday’s close.

We are in uncharted territory here, in more ways than one. While public health officials and governments are trying to control the spread of the most widespread pandemic in 100 years, many investors and traders are experiencing their first bear market ever.

For investors, it’s important to remember your time horizon. After the financial crisis, it took the S&P 500 about five-and-a-half years to recover all the way and make new all-time highs. Any investor with a decades-long time horizon should take comfort in that fact.

Shorter-term investors need to consider their risk tolerance. Depending on your need for capital in the near-term, now may be the time to rotate some of your portfolio into cash or cash equivalents.

For traders, the adage “trade within your means” has never been more appropriate. As volatility rises, spreads can widen. It’s more important than ever to manage your risk by trading with smaller positions, setting tight stops, or even stepping away entirely if you need to.

In terms of the U.S. market, it’s entirely reasonable to expect things will get worse before they get better. But they will get better. New cases in China have begun to decelerate, and the vast majority of people with confirmed cases remain asymptomatic.

All we can do in the meantime is keep ourselves safe and ride out the wave.

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