What is the first image that comes to your mind when someone mentions the stock market? Is it the frenzied trading floor on Wall Street? Is it the scrolling of green and red numbers on a stock ticker? Maybe it’s the charts and graphs in your portfolio performance reports, depicting the different market cycles.
Of all the images commonly associated with the stock market, none may portray the volatility of the market better than the famed bull and bear of Wall Street. This famed dueling duo are forever at battle to see who will control the way the market swings, and in what market cycle we will fall. Understanding market cycles is crucial, as in bull markets, equities rise, while in bear markets, they fall. By studying the market cycle chart, investors can better anticipate these shifts and make informed decisions.
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The Difference Between Bull and Bear Markets
Before we dive in, there is one important fact that needs to be acknowledged: over the long term, the market goes up. However, it is difficult to lose sight of this fact in times of extreme (or even mild) volatility, as different stock market cycles come into play.
While market fluctuations are certainly uncomfortable, they are inevitable, and no one can truly predict when they will happen. It’s best to be aware of the market cycles the market endures in order to brace yourself and prepare for bear-dominated years.
Bull markets are characterized by lengthy periods of time—typically years—over which stock market prices generally rise. Bear markets, however, are generally shorter time periods in which macro and micro events—ranging from politics to economics to investor sentiment—drive stock prices down 20% or more from their previous high. Knowing where we are in the stock cycle can help investors manage their expectations and strategies.
The Good News About Market Cycles
The good news is not just that history has consistently showed us that the markets recover and trend upward, but that bear markets are short-lived. The average length of the bear market is 9.6 months, which is significantly shorter than the average bull market of 2.7 years. Plus, while stocks lose an average of 36% in a bear market, they gain an average of 112% in a bull market. Observing the market cycle chart over time highlights these trends and helps investors stay focused on the long-term picture.
Assuming an investment horizon of 50 years, you can expect to live through approximately fourteen bear markets. Although it is certainly difficult to see your portfolio take a hit—especially as you get close to retirement—it’s important to remember that market cycles are a natural and inevitable part of the investing process.
What Should You Do in a Bear Market?
No one can predict when a market cycle will shift, and it isn’t generally until the market cycle has run its course that we can look back and identify the peaks and valleys. But, if you and your advisor believe that a downturn is approaching, you may be able to make some tactical decisions to take advantage of the dip. Options include buying more equities at discounted prices, strategically selling securities for tax-loss harvesting purposes, or simply re-balancing your portfolio to better position yourself within the current market cycle.
Aside from the calculated and deliberate sale of equities for the purpose of tax-loss harvesting, it is imperative that investors do not allow a fear of loss to steer the decision-making ship. During bear markets, investors who act on emotion sell their investments near market lows, wait on the sidelines for a rebound, and buy back after the market has already seen its initial upswing—the upswing that could have recouped some of their losses. Missing the initial rebound not only sets them further back but can significantly dampen their long-term returns. Understanding the nature of market cycles can help prevent these costly mistakes.
At any given time, there are countless influences affecting the market. Some are easier to identify than others. But the key to getting through these times of uncertainty is less about knowing exactly where we are in any given market cycle, and more about trusting that sticking to your investment plan—designed and geared toward your personal objectives—is the best defense against market downturns.
At Uncommon Cents Investing, we help investors and their families navigate the ups and downs of the market while keeping them on track to meet each of their financial goals. To learn more about our services, we encourage you to contact one of our advisors today.
