Replay: Battling the BearInsights Investment Retirement Planning Stock Market Bear Market Inflation Interest Rates
Wealth Wednesday Live: 3rd Quarter Update and Answering the Big Questions
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A Rough Start
Through the first three quarters, the investment markets have not been kind. Both the stock market and bond market have decreased significantly.
Stocks entered bear market territory in June. Following a strong rally in July and August, stocks fell to a new low in September. At the end of the third quarter, the S&P 500 was down nearly 25% and the NASDAQ was down more than 32.
When interest rates (or yields) rise, bond prices fall. This has been one of the biggest stories this year. The continued battle against higher inflation has pushed yields and interest rates higher. As a result, the returns from bonds have been negative.
A Unique Year
Most of the time, we expect bonds to be a buffer against stock market volatility. It is the first time in any of our careers we have seen both the stock market and the bond market generate double-digit negative returns in a calendar year.
How does this Bear Compare?
Since World War II, Investors have now experienced 15 bear markets. In the previous 14:
- The average decrease has been -31.79%
- The average number of days to reach the low point has been 400 days.
- The average time it takes to set new highs is 20 months
By most measures, this bear market is currently below average. We all hope it remains an underachiever.
Never in a Straight Line
We know the stock market does not increase in a straight line. These bear markets are a temporary interruption to the longer-term more permanent advance over time.
But the stock market also does not decrease in a straight line. You may have heard the term bear market rally. So far in 2022, we have experienced 4. They range from 6% to 17.5%. You could call these a temporary interruption to the shoter-term temporary declines we face from time to time.
Bear Market Math
Investment math is complicated. A 10% loss followed by a 10% gain results in a return of -1%. Compounded returns are not a function of addition and subtractions. It's multiplication. That means you need to earn more than you lost in order to break even.
At the end of September:
- The S&P 500 is down -23.87%. It will have to increase 31.35% to set a new high.
- The NASDAQ Composite is down -32%. To break even, it will have to increase 47.06%.
- The Bloomberg Aggregate Bond Index is down -14.61%. It wil need to improve by 17.11%.
Mid-term elections are fast approaching. Politics are a sensitive subject and everyone has their own feelings. But data is unbiased.
One of the more common things you will start hearing is something we like to call the "Third-year Phenomenon." In a presidential term, the third year—on average—generates the best returns of the four-year cycle. This happens in 2023.
Since 1970, the sweet spot seems to be the 8 months from November to June.
A word of caution: These past data points have no bearing on what we will see in 2023, or the 8 months from November 2022 to June 2023. Please do not interpret this as a prediction of what is to come. It's simply an interesting pattern. We won't know if the future fits into that pattern or if it is an outlier until it has passed.
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