Investing Through Recessions and Recoveries

When the stock market is running higher, investors want to jump in, afraid of missing out on potential gains. When the stock market is falling though, many investors run for the exits, believing that they are preventing further losses.

While investors aim to buy low and sell high, the fact is, because of emotions and the desire to get the greatest returns, investors end up making bad financial decision, with most actually buying high and selling low.

And with macroeconomic headwinds pointing to a possible recession later this year, there’s an increased chance investors will follow the old pattern of cashing out during a stock market sell-off and paying up after the markets have bottomed and are trending higher.

Being patient is not easy when the markets are falling, but patience and discipline is what investors need to generate the greatest returns and hit their long-term investment goals.

How Can I Predict a Stock Market Bottom?

While it would be great if we could avoid stock market declines altogether or predict when the markets hit a top or bottom, it’s impossible. And trying to do so means investors will miss the upside in hopes of avoiding the downside.

Last year was one of the most challenging in memory for investors. The S&P 500 hit a new record high in early January then trended lower, spending part of the year in both a correction (a 10% loss from a most recent high) and bear market (down at least 20% from a recent high). The index finished out the year returning -19.64%.

A new year has brought new hope for Wall Street and Bay Street with major exchanges in both countries up year-to-date. Investors are optimistic, but headwinds like a looming recession, stubbornly high inflation, rising interest rates, and the collapse of Silicon Valley Bank and First Republic Bank mean we’re not out of the woods just yet.

This uncertainty could, as some suggest, result in the S&P 500 tumbling 20% from current levels before bottoming this fall. But again, that timing is open to speculation. And timing the market is difficult and costly for even the most seasoned investors.

A recent study by the Bank of America has proved that investors who try and get in or out at the perfect moment end up missing the greatest opportunities.

So why not just jump back in when the markets are going higher? Some of the biggest stock market gains happen during volatile periods when investors have already run for the exits and before a clear sign that a bull market has even begun.

Over the last 20 years, 42% of the S&P 500 index’s strongest days occurred during a bear market. Another 34% of the S&P 500’s best days happened in the first two months of a bull market.

How Long Do Stock Market Corrections Last?

Stock market corrections, which are declines of at least 10% but below 20% from a recent high, are quite common. Since 1980, the stock market falls into correction or bear market territory every 1.2 years. Since the start of 1950, the S&P 500 has experienced 39 separate corrections.

And it didn’t take long for these corrections to find their bottoms. Excluding the 2022 bear market, 24 of the previous 38 corrections hit bottom in 104 days or fewer. Another seven corrections lasted between 157 and 288 days.

Once the stock market correction has bottomed, it can recover quickly. The average time for the stock market to erase all of the losses associated with a correction is just four months. Selling into a falling market is a permanent solution to a short-term challenge.

Which Lasts Longer – Bull Markets or Bear Markets?

Bull markets last longer than bear markets. A lot longer.

Yes, recessions and bear markets are painful, but they don’t last as long as people think. And bull markets outweigh the magnitude and duration of any bear market. That means that even with big declines, like in 2008-2009 and 2020, time is on your side,

Case in point: Since 1950, the average bear market has lasted 18 months, while the average bull market has lasted 54 months, with a total return of 152%. Basic math shows that bull markets last three times as long as bear markets.

On top of that, for the bear markets that ended in 1982, 1987, 2002 and 2009, the stock market hit a new high in an average of 32 months. The 2020 bear/bull market was an exception. It took less than five months for stocks to go from their March 2020 lows to a new record, making the 2020 bear market the shortest in history and the recovery the fastest in history.

What about the current bear market? The current bear market was officially called on June 13, 2022, when the S&P 500 fell 20% from its January 3, 2022 high. That means the bear market is 11 months old. This is longer than the overall average bear market of 9.6 months, but less than the longest bear market, which lasted 20 months back in 1973/74.

How long will this bear market last? There is no signal that announces the end of a bear market and the beginning of a bull market. We only know after the fact. What we do know though, is that bull markets can begin when the markets are still facing serious headwinds.

This highlights the need for investors to stay invested and make disciplined, appropriate decisions during any downturns. This will help protect and position a portfolio to take advantage of the eventual upside and new bull market.

Sharp Asset Management for Your Retirement Planning

Investors with a 50-year investment horizon can expect to experience around 14 bear markets. While it can be difficult to watch your portfolio take a hit, history shows it will be short lived. And staying invested can help generate significant gains you would have otherwise missed trying to time the market.

If you live in Mississauga, Toronto, or the GTA and would like to work with a private wealth management team that can help you create opportunity and mitigate risk no matter what direction the stock market is heading, the investment counsellors at Sharp Asset Management can give you the expert advice you need.

Sharp Asset Management Inc. is an independent Portfolio Management firm that is 100% owner operated. We are not affiliated with any financial institution, securities firm or mutual fund company. As a result, our investment decisions are unbiased. We do not earn any commissions or fees on investments we choose on behalf of our clients.

All of our investment counsellors are charter financial analysts, the highest level of achievement, and have over 10 years of experiencing managing portfolios. To learn more about investing with Sharp Asset Management, contact us today.