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This could be the longest bear market in history


Last year turned out to be one of the toughest on record for investors. When we officially turned the page, the timeless Dow Jones Industrial Average (^ DJI 2.13%)widely followed S&P500 (^GSPC 2.28%)and dependent on technology Nasdaq Compound (^IXIC 2.56%) decreased by 9%, 19% and 33% respectively. All three indices have spent at least part of 2022 entrenched in a bear market.

However, a new year brings new hope that better days are ahead for Wall Street. Unfortunately, history and hope are at odds with each other.

A $20 bill paper plane crashed and crashed into the financial section of a newspaper.

Image source: Getty Images.

Most stock market corrections are resolved within a year

Although you may not realize it, stock market corrections – declines of at least 10% from a recent high – are quite common. Since the start of 1950, the S&P 500 has undergone 39 separate corrections, according to data from consulting firm Yardeni Research.

The vast majority of these declines do not take long to find their respective troughs. Not counting the 2022 bear market, 24 of the previous 38 corrections since 1950 bottomed in 104 calendar days or less (about 3.5 months). Seven other fixes took between 157 and 288 calendar days to resolve. In other words, in all but seven corrections over a 73-year period, a stock market decline took more than 10 months to bottom.

By the close of Jan. 4, 2023, the S&P 500 had spent 282 calendar days in a bear market, according to Yardeni. We are only days away from entering rarefied territory in terms of the duration of the existing decline.

If there’s a silver lining here, it’s that the duration of a stock market correction is not correlated to the depth of the decline. Four of the S&P 500’s 10 longest corrections since 1950 have resulted in maximum declines ranging from just 14% to 19%.

Nevertheless, the current bear market does not seem close to a bottom.

This could become the longest bear market on record

There is no doubt that the Federal Reserve and investors (incumbents and new) are navigating in uncharted waters. At no time in the history of our nation’s central bank has it had to aggressively raise interest rates as the stock market plunged. But with the US inflation rate hitting a four-decade high of 9.1% in June, controlling the pace of price increases has become paramount.

While the Federal Reserve’s monetary policy isn’t particularly helpful in identifying when a stock market correction will occur or the depth of the decline, it can be very helpful in deciphering when the stock market will find a bottom and reverse. his courses.

Table of effective federal funds rates.

Effective federal funds rate data from YCharts.

Since the start of this century, the Fed has undertaken three rounds of interest rate easing (i.e. the country’s central bank has lowered interest rates). In each of these cases, it took the benchmark S&P 500 a long time to find its footing.

  • January 3, 2001: During the dotcom bubble, the country’s central bank cut the federal funds rate from 6.5% to 1.75% in less than a year. However, it took 645 calendar days after that first rate cut for the S&P 500 to reach its nadir.
  • September 18, 2007: The financial crisis forced the Fed to cut its federal funds rate from 5.25% to a range of 0% to 0.25%. But the S&P 500 only bottomed 538 calendar days after that first rate cut.
  • July 31, 2019: The third round of easing this century saw the Fed cut its federal funds rate from a range of 2% to 2.25% to 0% to 0.25%. The S&P 500 bottomed out during the coronavirus crash in March 2020 – 236 calendar days after that first rate cut.

On average, it took 473 calendar days (about 15.5 months) this century for the broad-based S&P 500 to bottom out after the central bank began a rate-easing cycle.

Here’s the problem: the Fed is far from an easing cycle. According to the Fed’s “Summary of Economic Projections” (also known as the “dot chart”) in December 2022, interest rate easing is not expected until 2024. If so, and that the S&P 500 adheres to this century’s average time to find a bottom, we are talking about a bear market that could easily exceed more than 1,000 calendar days and become the longest on record. Currently, the longest bear market occurred between 2000 and 2002 and lasted 929 calendar days.

A person who carefully reads the financial section of a newspaper.

Image source: Getty Images.

Three smart ways to invest during long bear markets

While this probably isn’t the projection you want to hear, it doesn’t have to be bad news either. Bear markets have always been a great time to grow money and allowed investors to invest in proven companies at steep discounts.

One of the smartest decisions investors can make during a long bear market is to buy dividend-paying stocks. Publicly traded companies that pay a dividend are generally consistently profitable and have been able to navigate through previous economic downturns. Additionally, dividend stocks have significantly outperformed non-payers over long periods. In short, these are exactly the type of businesses you should want to own when uncertainty reigns.

Investing in defensive sectors and industries can also be a stroke of genius. For example, electric utilities are a solid bet to outperform during a bear market due to their highly predictable cash flows. Owners and tenants change their electricity consumption habits little from one year to the next. Additionally, most electric utilities operate as monopolies or duopolies, leaving consumers with little choice.

A third smart move during long bear markets is to consider buying exchange-traded funds (ETFs). Buying ETFs allows investors to instantly diversify or focus their investments with the click of a button. With an ETF for just about every sector, industry, trend, region, and market capitalization, investors have a multitude of ways to grow their money over the long term without necessarily having to worry about the risk of individual stocks.

The key point here is that continuing to invest, even during a potentially long bear market, is a wise move for long-term investors.



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