Entering the Bear Market
By Megan Horneman. © Verdence Capital Advisors
- Bear market is officially here.
- Fed opens the door for the bear with largest single rate hike since 1994.
- Volatility is likely to remain as inflation and economic environment is unclear.
- History suggests bear markets present opportunities.
- Remain patient and focus on long term investment objectives.
Last week the S&P 500 officially entered bear market territory when it fell 24% from its January 3rd high. This is the first bear market since the 34% decline in February-March 2020. While we cannot pinpoint the bottom in this bear market, we are confident that volatility is likely to stick around in the near term.
The inflation environment is highly uncertain and there are signs that the Fed’s goal of cooling the economy is materializing. Consumer spending is weak, confidence is at a record low, housing data is disastrous and even manufacturing data is softening. As a result, according to Bloomberg, the odds of a recession over the next 12 months have increased to 30% (from 15% to start the year).
Recessions and bear markets are a normal part of all economic and investment cycles. Bear markets always feel bad while you are in them. However, history suggests that if you exercise patience and focus on your long-term objectives that often adding to equities when the market drops 20% have yielded attractive returns over the long term. If an investor bought the S&P 500 when it crossed into bear market territory (at the 20% drop), the average return one year later would have been 19% and the S&P 500 was positive 73% of the occasions. In the three- and five-year time frame, returns would be 37% and 51% and the S&P 500 was negative only on one occasion.
Bear markets are difficult to digest and painful while experiencing them. We are monitoring the economic environment and realize that the risk of a recession is high. We are looking to put dry powder to work in areas of the market that may have already priced in the pessimism.
This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.
Past performance is not a guarantee of future results.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses.