Financial Advisor in Raleigh NC: What is a Bear Market?
Bad news sells.
As financial advisors in Raleigh NC, we are not deaf to the constant drumbeat of financial pundits warning that a bear market is coming. Loud arguments over whether a bear market has begun or predicting when one will end primes the consumer for doom. Then, financial media offers up ads saying this time is different and the world is ending so invest in this or that prudent strategy.
News flash - Bear Markets happen. So, let’s click off the TV and dig deeper into what a bear market is and what we might expect. Also, how does it differ from other market fluctuations? And how long does one last?
What is a bear market?
A bear market is an extended period of depressed securities prices. Generally, the stock market is said to have entered a bear market when a broad index, such as the S&P 500, spends at least two months at 20% or more below its previous peak. Bear markets represent a larger price drop than a dip, defined as a drop of less than 10%, and a market correction, a drop of between 10% and 20%.
A bear market is not the same thing as a recession, which is defined by a range of other economic factors, like gross national income (GNI) and the unemployment rate. But it’s not uncommon for bear markets and recessions to occur around the same time.[1] The appearance of one may raise fears that the other is looming.
When people talk about bear markets, they’re usually referring to a general drop in prices across the stock market. But they can exist for other asset classes, such as bonds. They don’t have to be that broad, either. Sometimes a single sector or commodity can be experiencing its own bear market while the prices of other securities in its asset class continue to climb.
[1] “Analysis-U.S. stocks’ bear market growl could beckon recession.” Thomson Reuters. June 14, 2022. https://kfgo.com/2022/06/14/analysis-u-s-stocks-bear-market-growl-could-beckon-recession/
What is a Bull Market?
The opposite of a bear market is a bull market. A bull market is a market that is on the rise and where the conditions of the economy are generally favorable.
According to the formal definition, a bull market takes effect when stock prices have broadly increased by at least 20% since the last market downturn. Bull market conditions can last for decades, and many successful investors have bet very wrongly by trying to predict the end of a bull market.
In the case of equity markets, a bull market denotes a rise in the prices of companies' shares. In such times, investors often have faith that the uptrend will continue over the long term. In this scenario, the country's economy is typically strong and employment levels are high.
How long do bear markets last?
As measured by the S&P 500, bear markets have lasted anywhere from a few weeks to several years.[1] No one can predict with certainty when a bear market will end.
Historically, bear and bull markets have not appeared on a regular schedule. Far from it.
For example, the bear market of 2020 was the first one the S&P 500 had experienced since 2009. The next bear market appeared less than two years later.[2]
In fact, you can’t know for sure that a bear market has ended until you’re well into the next bull market. Once prices have returned to their previous peak, you can look back to find the point when prices were at their lowest — that’s when the bear market ended and the new bull market began.
[1] “Stock Market Historical Tables: Bull & Bear Markets.” Yardeni Research. August 15, 2022. https://www.yardeni.com/pub/sp500corrbeartables.pdf
[2] Ibid.
What do bear markets mean for investors?
Investors respond differently to bear markets depending on their goals and strategy. Aggressive traders may seek to make money in a bear market with risky strategies, such as short sales. In a short sale, an investor sells borrowed stock, buying it back later to return to the lender. If the price dropped in the meantime, they’d make a profit.
To decide what you should do in a bear market, it’s best to consult your financial advisor or financial planner. If you’re investing to meet long-term financial goals, it may make sense to hold steady during a bear market. That’s because the stock market has historically increased over the long-term, despite bear markets. Selling when prices are low risks selling at a loss, while staying in lets you participate in the rising prices of a potential recovery.
You may consider dollar-cost averaging, a popular investment strategy in which you contribute a set amount of money to your stock portfolio at regular intervals. It’s designed to help you buy more assets during a bear market when prices are low.
By contributing a consistent dollar amount to your investment portfolio, you will naturally buy more shares of a stock or fund when prices are low and fewer when prices are high. This can benefit you in the long run by lowering the average price you pay per share.
Tax-loss Harvesting During a Bear Market
Although bear markets are a natural part of the stock market, nobody likes seeing their portfolio decrease in value, even if it's just on paper. You should always focus on the long term, but some moves can be made during down periods to give you some short-term relief. Cutting your tax bill is one of them.
Just as your capital gains add to your tax bill, capital losses can lower your taxable income and offset any capital gains you owe taxes on, up to $3,000. For example, if you sell Stock ABC and make $3,000 in profits and also sell Stock XYZ at a $3,000 loss, they would offset, and you would have no tax implications. If you sold Stock XYZ at a $2,000 loss, you would owe taxes on $1,000 in capital gains. If you sold Stock XYZ for a $4,000 loss, you could deduct $1,000 from your taxable income. This is called tax-loss harvesting.
During bear markets when prices are dropping, that may be the chance to either offset some of your capital gains for the year or lower your taxable income with some of your losses. While you should always be focused on the long term and not be discouraged into panic selling during bear markets, it's important to know when to cut your losses.
Bottom Line
The inevitability of market downturns is why investors build diversified portfolios in the first place. It makes it less likely that your entire portfolio will be experiencing a bear market at the same time. Your financial advisor or financial planner can help you decide what a particular bear market means for your overall plan and whether you need to change your approach if markets take a downturn.
SOURCES:
https://www.yardeni.com/pub/sp500corrbeartables.pdf
https://www.fool.com/investing/how-to-invest/bull-vs-bear-market/
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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
