The Bear is Back
Provided by Avenues to Wealth
On the one hand, raising interest rates is a tool that is often used to fight inflation. Higher interest rates often reward saving over spending. If Americans spend less, demand for goods and services go down, forcing companies to lower their prices if they’re to attract new business. Lower prices, of course, means lower inflation. On the other hand, higher rates mean higher borrowing costs and more expenses for both individuals and companies. If rates rise too high, too fast, it could trigger nationwide layoffs, a crash in housing prices, and more.
Still, many economists expected the Fed to announce even larger rate hikes, both because of inflation and because the economy may be able to handle it. After all, if you remove inflation from the equation, the economy is actually in pretty good shape. The unemployment rate is at 3.6%, which is almost back to where we were in January 2020 before COVID hit.1 And consumer spending – the bedrock of our economy – remains strong. It was to shore up the economy that the Fed dropped interest rates in the first place. Now, the thinking goes, that mission is complete, which means it’s time for the Fed to pivot to the second prong of their “dual mandate”: stabilizing prices. (The first prong is stable employment.)
Which is why we need to be prepared for either result – both mentally and emotionally. Because the headlines – or rather, how we react to them – will play a big role in determining how well we navigate these turbulent times.
You see, news of a bear market is an unpleasant headline in a year that’s been full of them. But in my experience, the real danger during market conditions like these is not the bear itself, but the way people respond to it. Because, when you think about it, headlines are written to seem big, grand, even epic. They’re designed to get your attention. What they are not designed to do is give advice specific to you. So, let’s talk about what a bear market does and does not mean for your investments, your financial plan, and your financial goals.
What a Bear Market Means
Have you ever been driving on the road and hit every green light on the way to your destination? It’s a great feeling, isn’t it? Well, that’s sort of what a bull market is – and the road is the journey to your financial goals.
A bear market is the opposite.
During a bear market, the road to your financial goals, for the foreseeable future, is like getting caught at every red light in a major traffic jam. We’re still progressing toward your goals, but we’re inching instead of cruising. Sometimes, we may not move at all for a while. Sometimes, it may be necessary to take a detour and backtrack. It’s not fun, but it’s also not the end of the world. Because here’s what a bear market doesn’t mean:
Have you ever been caught in rush hour traffic, and the lane you’re in just won’t budge? Meanwhile, the lane next to you seems to be moving just fine. So, as soon as you see an opening, you merge into that lane – only to immediately slam on your brakes. Now the new lane is backed up! So, you try again…until you find yourself in the very lane that’s closed off and causing a traffic jam in the first place.
This is what emotional, undisciplined investors do during bear markets. They start frantically trying to change lanes, get off the road, or even abandon the car altogether. As a result, they burn fuel, waste time, and end up making the situation worse – because they aren’t where they need to be when the road gets cleared and the traffic speeds up again.
They aren’t there when the bear market inevitably ends, and a new bull is born.
You see, history doesn’t show us how long a bear market will last. Until now, we’ve had three bear markets in the 21st century. The first, in the early 2000s, lasted 929 days. The second, amidst the Great Recession, lasted 517. But the third, back in early 2020, lasted only 33.2 What history does show us is that past bear markets have been temporary. The markets usually recover – and the recovery can be a generational chance to get in the next bull market on the ground floor.
Warren Buffett once said, “The stock market is a device to transfer money from the impatient to the patient.” If we can remember this; if we can remember what a bear market means and does not mean, we can not only weather this volatility…but turn it to our advantage in the long run. Because while a bear market may signal the end of a bull, it does not signal the end of our investment strategy. Your financial plan. Or your journey toward your financial goals. Because, at the end of the day, we’re prepared for this. Our car is tuned up, and there’s plenty of gas in the tank.
A bear market just means we might have to sit in traffic for a while.
My team and I will keep a close eye on what the Fed does and how the markets respond to it. Expect to hear more from me on this subject soon. In the meantime, please let me know if you have any questions or concerns about the road ahead.
Jonathan Neher, Diane Watson and Zachary Lind may be reached at 970.372.0541 or support@a2wfinancial.com.
1 “The Employment Situation – May 2022,” Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf
2 “Stock Market Briefing: S&P 500 Bull & Bear Market Tables,” Yardeni Research, Inc. https://www.yardeni.com/pub/sp500corrbeartables.pdf
This material was prepared by Bill Good Marketing.
