The threat of recession in the U.S. and abroad continues to be a topic in the news. What's important to remember is that media pundits and even economists are not clairvoyant—they can't tell us what the future holds. If these experts were to look into a crystal ball to view past events, however, they would see a cycle where market declines happen naturally before disappearing in the wake of revitalization.
Unfortunately, the past has also shown that investors often sell their holdings in response to signs of industrial struggle. While this serves to allay their personal fears, it further weakens market conditions. The cycle can be unnerving, but there are potential benefits in such markets for those who invest with a long-term view.
Recessions and bear markets
The widely accepted definition of a recession is a period during which economic activity, in terms of gross domestic product (GDP), declines for two consecutive quarters. That said, market analysts and the media can often misinterpret or skew the numbers and lead us to believe that our economy is already in recession. Yet all too frequently, what appears to be the initial stage of a recession is simply a bear market.
Signs of a bear market:
- A condition when the price of securities falls or is speculated to decline
- Typically marked by a substantial downturn of 20 percent or more
Lackluster and negative perceptions of future economic woes, coupled with instability in the global marketplace, certainly feed into the beginning stages of a bear market.
The ongoing energy and credit crises in 2008 are examples of this. When crude oil reached nearly $150 per barrel in June 2008, high-profile speculators propagated an impending dilemma; the resultant rapid rise in the price of crude in turn boosted the price of everyday commodities while income remained steady. Adding to this is the fixed income and credit malaise that shook the financial markets. Not surprisingly, investors reacted fearfully in a selloff that many argue has pushed the U.S. into a bear market.
What does a bear market mean for your portfolio?
The implications of a bear market for your portfolio can differ depending on your investment strategy. Investors who make short-term trades or require access to funds while in the downturn may suffer losses. Indeed, investors who think in the short term and react by withdrawing funds from the market may lose the opportunity to recoup losses. Rebounds after a bear market cannot be predicted, but typically occur quickly, making it wise to stay invested to capture the opportunity.
Conversely, long-term investors could have the upper hand in a bear market, as they have time on their side—time for the markets to rebound and potentially gain back their initial losses. Moreover, long-term investors may be more likely to benefit in the future because they can purchase additional securities when prices are low. Other opportunities in a bear market for investors with a long-term strategy include rebalancing (at lower investment prices) and tax-loss harvesting.
Devising a long-term strategy to pursue your goals is the best course of action in any market. A financial professional can assist you in this endeavor and offer the guidance you need to maintain a consistent strategy, regardless of market conditions. If you are interested in learning more about how you can weather a bear market, contact your financial advisor.