EC Bear Market Awareness Checklist

Bear markets characteristically align with economic contraction.

In his seminal tome – “Anatomy of the Bear – Lessons from Wall Street’s Four Great Bottoms,” which should be required reading for advisors and professional investors, author Russell Napier provides comprehensive analysis of market where stocks cycle from overvalued to undervalued (14 years on average) coupled with chronological events which marked bear market bottoms of 1921, 1932, 1949 and 1982.

Mr. Napier found that economic and market troughs occur together which busts a popular myth that stock market activity leads the economy by six to nine months. In fact, the economy can lead the stock market perhaps because investors wait for validation that the economy is undergoing a sustained recovery or central bankers are riding in with liquidity reinforcement.

Per research conducted by the Center on Budget and Policy Priorities (CBPP.org) on the Great Recession, U.S. economic recovery began in June 2009; the stock market bottomed only three months earlier thus validating how the economy and markets are a capricious couple.

The professionals are doing their homework, opining as to the reasons behind the market sell-off; we share those insights daily at Real Investment Advice. However, although I’m interested and participate in the research, along with my colleagues the primary concern is to stem the damage to client wealth. Those close to or in retirement who are primarily dependent on variable assets like stocks and bonds to provide a steady retirement income paycheck are in greater peril when face-to-face with the bear.

The financial industry showers accolades on investors who earn their stripes by riding markets to bottoms and maintain discipline to wait the time it takes to recover. Per Greg Morris, in his book “Investing with the Trend: A Rules-Based Approach to Money Management,” on average it takes 6 years to recover a 20% loss in the S&P 500.

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Kurt Benson 10 months ago Member's comment

Good stuff, thanks.