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By Joe Arnold, AIF®
As you may have noticed in the news, the coronavirus pandemic (1) is wreaking havoc on the markets. Is this the end of the record-breaking bull market that we have been enjoying since March 2009? Could this lead to the next recession?
With so many worries voiced by the media, it is important to get your terminology straight and understand what it is they are talking about. What is a bear market? What is a recession? What should you be doing about it?
What Is A Bear Market?
A bear market happens when an overall market benchmark, such as the S&P 500, dips by 20% or more from its most recent high. (2) It’s important to note that normal stock market volatility isn’t an indicator of a bear market, as we saw over the last 11 years. Normal dips and swings are necessary for long-term growth and shouldn’t be cause for concern.
However, it seems that we are exiting normal territory. The Dow Jones Industrial Average, a popular stock index, did in fact enter a bear market on Wednesday, March 11, having lost just over 20% since February 12. (3) Only time will tell if the other stock indexes follow suit.
What Is A Recession?
A recession is defined as two consecutive quarters of economic decline (emphasis on the word economic). They’re measured using factors such as the employment rate, gross domestic product, bond yield curves, and other factors independent of the stock market. (4) Our current unemployment rate remains very low at 3.5% (5) and our most recent US GDP figures show 2.1% growth, which is healthy. (6)
Economists declare recessions retroactively. For example, the Great Recession wasn’t confirmed until November 2008—11 months after it started. (7)
Bear Markets Vs. Recessions: How Are They Related?
A bear market relates to the stock market. A recession relates to the economy. Contrary to popular belief, the stock market is not the economy. Investor emotions are what drives the stock market—which, as we all know, can be fickle. As humans, we have a tendency to be overly optimistic when there’s no data to support our feelings and pessimistic when data looks great.
Recessions are the complete opposite. Tangible factors determine the state of our economy. There’s no emotion involved. Which begs the question: Why do people correlate recessions and bear markets?
If you look back on history, recessions and bear markets have usually occurred around the same time. Of the last 11 S&P 500 bear markets we’ve had since 1957, 63.6% came after a recession. (8) The two go hand in hand, but they’re not the same.
How Should Investors Respond?
Though it looks like we may very well be entering a bear market, that does not guarantee that we will enter into a recession. Either way, emotions are running high which often leads to rash actions that are not well thought out.
If you are an investor with a plan, though, you should be able to breathe easy. At Foundation Wealth Advisors, all of our client plans are designed with potential bear markets and recessions in mind. That’s why we stress diversification and a long-term time horizon. Both of those principles have weathered bear markets time and again. When emotions are running high like they are now, the best thing to do is nothing. Just sit tight and trust your plan.
How We Can Help
While we advise investors with a plan to sit still and relax, what if you don’t have a plan? The best time to address that would have been a month ago, but it’s not too late. If you’re worried about the markets and economy because you don’t have a plan or don’t trust the one that you do have, we can help you. Schedule a complimentary appointment by calling (440) 899-7535 or emailing me at jarnold@foundationwa.com
About Joe
Joe Arnold is an independent financial advisor and the founder and president of Foundation Wealth Advisors, LLC, an independent firm providing private investment management for individuals and families, as well as retirement plan consulting for small and mid-sized businesses. With almost 20 years of experience in the financial industry, Joe specializes in providing objective advice to individuals, as well as transparency in building and managing company 401(k) retirement plans. He is committed to putting his clients’ best interests first in all decision-making and recommendations. Based in Westlake, Ohio, he serves clients in the Cleveland, Akron, and surrounding areas, as well as throughout the country. Joe received a bachelor’s degree in business administration from Cleveland State University and is an Accredited Investment Fiduciary® (AIF). He has been featured on national television, including CNBC and FOX Business, and quoted in various publications, including The Wall Street Journal, CNN Money, Forbes, and others. Joe lives in Rocky River, Ohio, with his wife, Allison, and their two grown children, Kevin and Keira. An avid golfer, he is a former Class A PGA of America teaching professional and NCAA Division 1 athlete. When he’s not working, he enjoys playing golf, working out, and honing his culinary skills. To learn more about Joe, connect with him on LinkedIn.
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(2) https://www.investopedia.com/a-history-of-bear-markets-4582652
(5) https://data.bls.gov/timeseries/LNS14000000
(6) https://www.housingwire.com/articles/u-s-gdp-rises-only-2-1-in-q4/
(7) https://www.usatoday.com/story/money/2019/08/19/recession-what-does-mean-and-what-like/2030642001/
(8) https://dqydj.com/relationship-bear-markets-recession/