Bear Market?

The “market” has had a couple of bad days this week, and when I began writing this post yesterday, it had just completed its biggest one-day decline this year. Are we at the beginning of a new bear market? If so, what should one do?

First, what is a bear market? A bear market is typically defined as a decline of 20% or more in a given market over a prolonged period of time. In this case, prolonged is often defined as two months or more.

So, are we beginning a new bear market? The answer is nobody really knows because you can’t measure a bear market until after it has occurred. What we know is that we are six years into a bull market, which is pretty long. A strong U.S. jobs report indicating that the economy is better than many predicted was released and, while this may sound like good news, it is, ironically, bad news for the stock market. This news may cause the Federal Reserve to increase interest rates sooner than expected, signaling the beginning of the end of “cheap” money and higher interest rates for borrowers. The dollar is also strong, trading at a 12-year high against the Euro, which is great for people planning a trip to Europe but not good for U.S. companies who export goods.

The market (speaking as if it is an individual) has been expecting an increase in rates. It doesn’t like to be surprised, though, and what we don’t know is whether this is a temporary reaction to a surprise or the beginning of a real downturn. There have been other times in recent years when economic indicators have surprised on the positive side, markets reacted poorly, and the Federal Reserve was forced to backtrack on potential rate increases. It reminds me a little bit of a spoiled two-year old having a temper tantrum and a parent who gives in to avoid a scene. (No comment on whether I believe this is healthy parenting or financial behavior. It is what it is.)

Does it matter? The answer to this question depends on who you are. If you are a young person who is adding to your portfolio on a regular basis, or if you have some cash that you would like to invest, a bear market represents an opportunity to buy “on sale.” If, on the other hand, you are somebody who depends on your portfolio for income, or if you are an investor with a portfolio that is not well-diversified, a bear market could be unsettling at best, disastrous at worst.

Nobody knows for sure what is going to happen and all of us, individually, have no control over interest rates or the direction of the market. Downturns are normal and considered by many to be healthy. Think of the phrase “two steps forward, one step back.”

What can you do? Focus on the areas where you do have control. Talk to your financial planner to review your investment portfolio. Ask them to work with you to determine an appropriate mix of assets for your needs, goals and risk tolerance. Then, if your investments are out of alignment, make adjustments. If needed, beef up your emergency savings so you won’t be forced to sell during a market downturn. (For people in or near retirement, consider having as much as two years expenses set aside.)

I believe that one of the worst things you can do is to try to time the market. The problem with market timing is it involves two decisions: when to sell and when to buy. Many people can get one of those decisions right. Very few people get both right.

If you have a well-diversified portfolio, though, and work with a professional advisor, hopefully you will have the confidence to ride out the downturn and be prepared for the inevitable upturn when the markets turn around again.