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It was a little less than one year ago, October ninth to be exact, that the Standard & Poor’s 500 last closed at a record high. Since that day when the S&P finished at 1565.15, as of the close of business this past Wednesday, this index has fallen 26.12% which is, by definition, a bear market. (The widely accepted definition of a bear market is a decline of twenty or more percent.) Furthermore, the Dow Jones Industrial Average has fallen 25.10%, once again marking a bear market. All of this carnage begs the question as to when it will all end.
It is safe to say that given the fact that we currently exist in a fear driven trading environment, much different from the commodities driven greed that existed a little over a year ago, nearly anything can happen. We have often pointed out that all trading in securities can be categorized in one of three ways. That is trading driven by greed, rational trading or fear driven trading. The reason why fear driven trading trumps the other two is that with fear comes concern for “self-preservation,” the greatest force of all! Eventually though, reason will once again take hold and as a result the market will bottom and again move along a rational path. (Yes, we do consider the current depths to which the market has fallen, irrational, just as the events during the late 1990s were irrational.
Investors may find some solace in the fact that since World War II there have been nine bear markets and that the average decline in the S&P500 was thirty percent. In addition, the average bear market lasted fourteen months. Given the fact that the S&P500 has fallen over twenty-six percent these past twelve months, it stands to reason that we are in the vicinity of a bottom. That said, nobody has the ability to pinpoint the exact bottom. History will provide the answer.
Despite the elusive bottom, equity markets have tended to respond favorably over time to declining interest rates, rising money supply and tax cuts. One must assume that this bear market will ultimately succumb to these forces as well. One must also assume that, given the nature of the decline in the stock markets, we are much closer to a bottom than a top and opportunity exists for investors with a one to three year time horizon.
Meanwhile, what is an investor to do? First and foremost, if you are withdrawing money from your portfolio on a systematic basis, review your investments to make certain that you have two to three years of income in either fixed income or cash positions. Those that do not need income from their portfolios, your asset allocation depends upon a number of variables, including time horizon, risk tolerance, financial objectives, financial obligations, pension structure, social security projections, and so on.
Another important trait to help you weather this bear market is patience! The markets are not going to turn around over night. Remember, a watched pot never boils! Turn off the financial news networks (the negative impact these networks bring on the investors psyche is a story for another column!), stop valuing your portfolio on a daily, weekly or even monthly basis and enjoy life!
Do some research and as a result make a “wish” list of the investments that you want to buy and at the price you want to pay for them. Should they fall to these prices, double check your research and if still attractive, dollar cost average into them. Once again, don’t expect them to skyrocket overnight.
Last, but not least, recognize that the stock market has many of the characteristics of a bully! It wants to inflict the most amount of pain on as many people as possible! Once it has accomplished this and stocks are in the hands of their rightful owners, it will end.
Learn from this market. We keep notes as to our accomplishments and errors. At some point in time, when the bear is back in hibernation, we will be certain to relate them to you in the form of a column.
During these difficult times, let us hope that we get some rational way of thinking into the market!