Keep Calm, Bear Markets Are Temporary

Keep Calm, Bear Markets Are Temporary

We may very well be headed for a recession—some economists believe it’s already here—but we’re most definitely in a bear market, normally defined as occurring when stocks are off more than 20 percent from their peak.

Not only that, but this selloff has been several times steeper than the past two bear markets. Whereas it took stocks approximately 240 trading days to fall more than 20 percent during the tech bubble, and about 190 days during the financial crisis, U.S. equities lost more than 20 percent in under 20 trading days as a result of fears over the coronavirus. As of Tuesday’s close, the S&P 500 was down 25 percent from its high on February 19.

Market selloff has been steeper than past two bear markets

As it happened, the Treasury market was warning us (again) all along. Most downturns of the past have been preceded by a yield curve inversion, which happens when the longer-term yield falls below the shorter-term yield, and this time was no exception. The chart below shows the 10-year Treasury yield minus the three-month Treasury yield. In each case, a recession hit in the months after the yield curve first inverted and began to recover.

Treasury market was warning us all along...

Awaiting Monetary and Fiscal Stimulus

Now the question is what investors should do. It’s been more than a decade since we’ve had to deal with the unique challenges of a bear market, and there are countless millennials (and younger) to whom this is a brand new phenomenon.

A couple of things to remember upfront: Don’t panic. Bear markets can be painful, but they’re temporary. More importantly, if you didn’t raise cash in December or January, before the full effects of the virus began to be felt, it’s probably too late to do so now. It may be a good time to do some bargain hunting for high-quality stocks right now, but generally speaking, I wouldn’t be trying to sell equities.

I understand the need for liquidity. That’s one of the reasons why I always recommend having some physical gold in your portfolio, to convert into cash if needs be. The yellow metal just had its worst week since 2011 for that very reason, falling 9.3 percent as investors took profits amid the plunge in equities.

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