The Bear Market Is Back

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We are now in another downswing in the ongoing bear market. Using the S&P 500 as a measure, as I write this the markets are down 22 percent from the peak at the end of last year and just under 14 percent from the end of the most recent rally in August. This year, there have been four drops and three rallies—and we are down quite a bit. That doesn’t feel good. But, feel good or not, here we are. So, the real question is: what should we do about it? To figure that out, we need to look at two things.

First, let’s look at history. Have we seen this before? Is the current pullback unusual, or is it fairly typical? If it looks pretty normal, that in itself is reassuring. History doesn’t repeat itself, but it does tend to rhyme. And history can give us an idea of how the song is likely to go. Second, why is this happening? Is there a reason that we can understand behind all of this? If there is a reason, then that understanding provides a basis for looking to the next steps.

Have We Seen This Before?

In the broader sense, yes, many times. Bear markets (declines of more than 20 percent) are typical enough that, as noted, they actually have a name. Looking back to 1980, there has been a decline of 20 percent or more in 9 of the 42 years, or about every 5 years. For 15 percent declines, that turns into 16 of 42 years, or about every 2 to 3 years. Significant declines are a regular and recurring feature of the stock market. In that context, this one is no different. And since it is no different, then like every other decline, we can reasonably expect the markets to bounce back at some point.

Why Is This Happening?

Although history is on our side, we still need to understand why this decline is happening. The primary reason is rising interest rates. There is an old Wall Street saying, “don’t fight the Fed,” which basically asserts that when the Fed is raising rates, the market will have a tough time. Just as the phrase bear market speaks to how normal the phenomenon is (normal enough to have a name), this too is normal enough to have a catchphrase associated with it. Not only the drawback itself but also the reason behind it are normal—and things we have seen before.

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