It is natural for investors to be concerned with investment portfolio performance during declining markets. One of our strategic partners, PGIM Investments, provides insight into how the stock market has behaved around previous bear markets.
BEAR MARKETS DEFINED
A bear market is a prolonged period in which investment prices fall, usually by 20% or more, accompanied by widespread pessimism. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly.
Fears of further declines and market volatility often lead investors to making the wrong decision, at the wrong time, for the wrong reason. This can result in many investors pulling money out of the stock market after absorbing much of the decline. But then they risk missing the subsequent rebound after a bear market, which historically has been very robust.
During previous bear markets, on average, the market declined substantially as the economy contracted. But, as the market discounts economic recovery, stock market returns have historically been quite substantial in the following year, followed by lesser returns in the following two years. Thus, it’s important to be in the market and experience those returns when the market does rebound.
As shown in the charts below, performance has varied throughout various bear markets. However, what each has in common is that the recovery in the first year was quite robust. While it can be difficult at the time, historically the most pessimistic period has made for good long-term buying opportunities. Keep in mind, however, past performance is no guarantee of future results.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).