It’s not exactly a secret that the markets have been dropping lately. In fact, since its peak at the first of the year, the broad market, as measured by the S&P 500, has fallen more than 1,000 points, going from 4,793 on January 3 to its latest close (at this writing) of 3,735: a loss of 22%. A bear market is defined as a retreat of 20% or more from market highs, and the current reading for the S&P 500 puts us officially in bear market territory.
For many of us, it feels like unfamiliar territory, largely because during the past decade, we witnessed one of the greatest bull markets in history. From the depths of the Great Recession in 2007–08, when the S&P 500 stood at just over 700, we watched the markets climb steadily—or at least it seems so in retrospect. In reality, there were notable selloffs during the bull market; in fact, the S&P 500 came close to entering bear markets in both 2011 and 2018. Still, when you’ve spent ten years or more watching the markets climb (mostly), it can be startling to witness sudden declines like those we’ve seen since the first of this year. For investors, it often seems that the markets take the stairs on the way up, but when they go down, they use the elevator.
What’s Driving the Market?
To understand a bit more of what is driving the markets currently, it’s helpful to look at a little history. As the economy began to recover from the Great Recession, the US Federal Reserve was pursuing a policy called “quantitative easing.” By purchasing Treasury securities—thus injecting liquidity into the economy—and working to keep interest rates at historically low levels, the Fed aimed to promote continued growth. And those efforts were mostly successful; during the years following 2008, the economy expanded at a modest, if not impressive rate. Inflation remained in a low range, well within the Fed’s “ideal” rate of 2%.
Then came the pandemic of 2020 and the resulting worldwide economic shutdown. That sent the US economy into a dive—along with most of the rest of the world. The S&P 500 plunged 23% (bear market) and the Fed began the most massive liquidity infusion in its history in a desperate attempt to prevent the economy from collapse, ultimately pumping some $5 trillion into the US economy. Once again, their efforts succeeded, and the economy began to expand, driven by massive cash infusions provided by the Fed to businesses and households. From its trough of 2,541 in late March 2020, the S&P 500 made a new all-time high of 3,508 by August of that year.
But as the economy began to expand again, inflation began to heat up, driven by increasing costs of labor (still in short supply), now-infamous supply chain snarls, and a consumer buying binge fueled by stimulus funds. Initially, the Fed insisted that inflation was “transitory” and declined to adopt more stringent policies that would tend to keep a lid on rising prices. But readings in subsequent months continued to contradict that analysis, and the most recent inflation reading (8.6% annual rate) has confirmed for many investors that the Fed is now playing catch-up. Some are concerned that the recent half-point increase in key interest rates—the largest increase in more than twenty years—will not be enough, and that the Fed will be forced to feed the economy even more bitter medicine in the form of higher interest rates and shrinking money supply—perhaps tipping the economy into recession.
The result of this uncertainty is market volatility, all to the downside. After all, the thing the financial markets hate the most is uncertainty, and until there is evidence that inflation is under better control, uncertainties around the economy and future Fed policy will continue to predominate.
How Should Investors Respond?
Given all this, how should investors respond? Once again, history may be instructive. Over the long term, the stock market has consistently demonstrated an upward bias. In other words, from a historical perspective, downturns tend to not last as long as uptrends. A recent analysis by Charles Schwab found that the average bear market lasted 446 days (including weekends and holidays), and the average bear market decline was 38.4%. On the other hand, bull markets averaged 2,069 days and returned an average of 209.2%. Though past performance is no guarantee of future results, investors can probably take some encouragement from these statistics.
It’s also important to remember that no one—including Wall Street analysts—knows exactly when the markets will reach their low point or how high they will climb, once they start going up again. As legendary investor Warren Buffett once quipped, “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.” Instead, the key is to remain invested in alignment with an established strategy, to stay patient and disciplined, and to allow the markets a chance to display the long-term resilience for which they are famous.
At Mathis Wealth Management, we understand that times like these can be difficult. But we also know that important investment decisions should be guided by solid research and careful consideration of each investor’s needs and priorities. If you have questions or would like to talk, we are only an email or phone call away. And to learn more about how we help clients develop personalized approaches to investing, click here.
Note: This is meant for educational purposes only and information presented should not be considered investment advice. Indexes referenced are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.