A bear market is defined as a 20% drop from a recent high in the stock market. Most major stock markets in the U.S. and around the world entered bear market territory in mid-March. An occasional bear market should not be surprising since they have occurred periodically throughout economic history. What sets this one apart is its suddenness. It took only 18 trading days for the S&P 500 to fall 20% from its recent high, the most rapid decline in U.S. stock market history.
Historically, bear markets have generally been followed by periods of above-average returns. As shown in the table below, average annual returns of U.S. stocks 1, 3, and 5 years after a 20% drop in the market have been well above the overall average annual return of 9.61%. This does not guarantee above-average returns going forward, but it points to a favorable historical precedent.
While we expect bear markets to occur intermittently, the events associated with the current crisis are unique. The viral contagion that precipitated the market crash threatens our health and well-being in addition to our finances. Hopefully, the pandemic will begin to wind down in the ensuing months, as we’ve already seen in China, South Korea, and other countries that were among the first to be affected. Once that happens, the animal spirits that drive human enterprise will begin to reassert themselves in the form of renewed entrepreneurship and thriving business activity. On a cautionary note, there is no guarantee that government stimulus programs will be effective or that the recovery will proceed without setbacks along the way, but we fully expect the global economy to recover over time as it has after previous crises.
Seeing your investment portfolio decimated in a market downturn can be a gut-wrenching experience and can lead to anxiety and concerns about your ability to meet future financial needs. Our advice is to stay the course. Adhering to a sound, long-term financial plan and asset allocation strategy is the best way to ride out the current crisis and participate in the eventual recovery.
Developing a financial plan for your future may be a constructive way to alleviate some of your concerns. We have strengthened our expertise in financial planning and retirement planning in recent years and are happy to offer these services to you at no additional cost. Please feel free to contact me directly if you would like more information.