We try to avoid cliches, but often a picture really is worth a thousand words. Here, our goal is to distill a timely market topic into just a few words and a chart.
ON THE RECENT MARKET DROP AND “BEAR MARKET” LABEL
Well, we are officially in a bear market. Because you are going to hear that phrase a shocking number of times in the coming weeks, we think it makes sense to cut through the noise and get at the heart of what exactly this means.
Technically, a bear market is a condition in which prices fall 20% or more from recent highs. This is a point worth clarifying, but does it even matter? In December 2018, the S&P 500 fell 19.8% from its recent high before reversing sharply; in 2011, 19.4%. This selloff is different for many reasons, but being a “bear market” is not one of them. As Baird’s Chief Investment Strategist Bruce Bittles wrote, “Bear market labels make great headlines.” Focus on what matters, not Wall Street semantics.
Below, we display the major drawdowns of the last five decades. Some were short and swift; others were deep and lengthy. We’re showing this chart to investors for several reasons. First and most importantly is that drawdowns, corrections, bear markets, call them whatever you want, are common and are a big part of investing in stocks. This bears repeating. Volatility, sharp swings, and the occasional 20% drop are features of the stock market, not bugs.
Still, big drops are excruciating. And if the recent move seemed especially chaotic, you’d be correct. Notice how thin the red line (indicating our current drawdown) is – that is because the current bear market selloff is one of the fastest in history. Much like the virus responsible for our current anxiety, stocks have moved as swiftly and dramatically as ever.
But what to do about it? Above all, do not panic and do not sell your investments at big losses. Fear is rampant, often stoked by sensationalist headlines and opportunistic grifters, but selling now only locks in losses and exacerbates the issue. Further, trying to time the market by selling introduces another wildly difficult question: when to get back in? It is precisely near market bottoms, after months of volatility and anguish, when buying stocks is the hardest action to take.
Ultimately, while bear markets are painful, they can also serve a useful purpose. Investors’ financial lives are fluid and constantly evolving, but sometimes it requires a dramatic event to take one’s own temperature. Is your stated risk tolerance appropriate? Is your asset allocation in-line with your goals? It is in these more trying times that we strongly recommend you connect with us to answer these questions and develop a sound plan for the long haul.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.
For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.
Copyright 2020 Robert W. Baird & Co. Incorporated.