On Monday, June 13th the S&P500 slid into a bear market (defined as a 20% or more decline from peak to trough) amidst fears that record high inflation will prompt more aggressive interest rate increases from the Federal Reserve this month. The Fed uses their tool of adjusting the federal funds rate (the rate banks borrow money from each other) when trying to slow demand in an effort to rein in inflation. While these rate increases may cause bond and equity markets to react negatively in the short-term, we do not expect higher rates to derail long-term market performance. What investors are now worried about is if the Federal Reserve can achieve a “soft landing” – bringing down inflation without putting us into a recession – as they continue their path of tighter monetary policy.

A traditional bear market that is provoked by recession tends to be very ugly (35% – 40% drawdown). Today investors are nervous, there are signs that confidence in the market is waning, but economists still widely expect GDP numbers and earnings growth to remain steady.

As troubling as it is to see stocks tumbling and portfolio values decline, here are a few things to note about past bear markets:

Since 1929, the S&P500 has experienced more than two dozen bear markets, however, not every bear market ended with a recession.
Over this same time period, on average stocks have dipped into bear market territory every 6 years with losses averaging nearly 40%. So, could we go lower? Yes, however, despite these market pullbacks stocks have risen over the long-term.
Half of the S&P500 Index’s strongest days over the past two decades occurred during a bear market.
Bear markets tend to be short-lived with the average length being 289 days (about 9.5 months). This is significantly shorter than the average length of a bull market, which has historically been 2.7 years.

The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation. S&P and S&P 500 are registered service marks of Standard & Poor's Financial Services LLC. The CBOE Dow Jones Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. You cannot invest directly in an index.

Successful investing is not about how much you know about the future of the stock market, but rather what you do along the way. So, what are we telling clients to make them better investors?

Understand that markets drop, correct, and go through periods of bear markets. If you are investing, volatility is unavoidable.
Timing the market is not an investment strategy.
Differentiate between your risk capacity (the ability to financially withstand volatile markets) and your emotional risk tolerance (one’s attitude towards taking risk to achieve a goal).
Do not rely on the rearview mirror meaning that past performance is not a guide to future results.
Periodic rebalancing is an essential investing discipline. This is the practice of maintaining your target asset allocation by adding to underperforming asset classes and trimming the outperforming positions.
Avoid selling to sidestep the downturns, missing even a few of the best days in a bad market can significantly undermine your performance.
Make a plan you can stick to and avoid making decisions based on short-term events. A diversified mix of stocks, bonds and short-term investments should align with your goals, time horizon and risk capacity.