The pandemic, inflation, geopolitical unrest, and other factors have resulted in significant stock market volatility this year. Market volatility is a sign that markets are working as they should by incorporating new information and adjusting prices. Stocks are priced by the market to provide a higher expected return than less volatile assets, like bonds. Realizing these higher returns often requires enduring periods of market volatility.
A bear market is defined as a 20% drop from a recent high in the stock market. The Dow Jones Industrial Average entered bear market territory on September 26 when it dropped for the fifth consecutive trading day. Historically, as shown below, bear markets (in red) have been followed by prolonged bull markets (in blue). This does not guarantee above-average future returns or a quick return to a bull market; however, it suggests a favorable historical precedent.
• Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
• Data is of S&P 500 Index total returns in US dollars using a 20% threshold for downturns.
• Chart end date is 12/31/2021, the last peak-to-trough return of 119% represents the return through December 2021. Due to availability of data, monthly returns are used January 1926 through December 1989; daily returns are used January 1990 through present. Periods in which cumulative return from peak is –20% or lower and a recovery of 20% from trough has not yet occurred are considered bear markets. Bull markets are subsequent rises following the bear market trough through the next recovery of at least 20%. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.
• Source: S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Market declines can lead to anxiety about your ability to meet future financial needs. Our advice is to stay the course. Sticking with a long-term financial plan and asset allocation strategy is the best way to ride out the bear market and participate in the eventual recovery.
As an equity investor, you will inevitably go through periods when your portfolio declines in value. Successful investing requires faith that capital markets will reward patient investors, as they have in the past. It takes discipline and a long-term outlook to adhere to a sound investment plan through good markets and bad.