Spending money can be delightful. But losing it? If you are watching big chunks of hard-earned savings disappear, losing money can be sheer misery.
That’s why the headlines proclaiming the arrival of a bear market have been so disturbing. Strictly speaking, a bear market is simply Wall Street jargon for a stock market decline of at least 20 percent. But this is not merely a matter of numbers. The term’s technical meaning doesn’t convey the full human experience.
Really, the fact that we are in a bear market means that a lot of people have already lost a ton of money. Until the momentum shifts, as it eventually will, considerably more wealth will go down the drain. Panicking only makes matters worse. For those who are taking enormous losses for the first time, a bear market can be the shattering of dreams, a time for suffering and grief.
Far more significant trouble could be coming, though, for the millions of people who have never been able to put aside enough money to lose it in the stock market. A recession may well be on the way. The United States has been in recession 14 percent of the time since World War II, according to data provided by the National Bureau of Economic Research, the quasi-official entity that declares when recessions start and stop in the United States.
With the Federal Reserve raising the benchmark federal funds rate 0.75 percentage points on Wednesday, and forecasting further increases to combat raging inflation, we certainly could be headed toward another recession. The Fed is also paring the bonds and other securities that it amassed on its $9 trillion balance sheet to bolster the economy. In a policy reversal, it is now engaged in “quantitative tightening,” and that will contribute to an economic slowdown.
Like bear markets, recessions have a dry, technical definition. A recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months,” according to the economic research bureau.
But, basically, a recession amounts to this for millions of people, many of whom are utterly indifferent to the vagaries of the stock and bond markets: Hardworking people will lose their jobs, millions of families will be short on money and countless people will suffer setbacks to their physical and mental health.
This is grim stuff. If I could design a world that eliminated the misery of bear markets and recessions, of course, I would.
But don’t wait for that to happen. The best we can do now is to recognize that bear markets and their far more troubling cousins, recessions, are not rare or truly unexpected events, even if the relative calm of the last decade may deceive us into thinking so.
Despite policymakers’ best efforts, history shows that both bear markets and recessions are about as common as severe storms in New York. Learn to live with them, much as you do bad weather.
Stocks don’t always go up. Risk is always present.
This may seem a banal insight, yet it is never entirely understood until market declines hurt, only to be ignored or forgotten when the next boom rolls around.
Try to take only as much risk as you can tolerate. Long ago, I stopped investing in individual stocks and bonds, eliminating the risk of owning the wrong security at the wrong time. Instead, I favor low-cost, diversified index funds that enable me to hold a piece of the entire global stock and bond market. And I’ve reduced my stock exposure as I’ve aged and increased my bond holdings. Bonds haven’t done well lately, but Treasurys and high-quality corporate bonds are still far more stable than the stock market.
Before investing, try to put away enough money to survive an emergency, and keep it in a safe place. If you have already managed to accumulate some cash, I’ve described some reasonable places to keep it, especially in this period of severe inflation.
They include I bonds, which are issued by the Treasury Department and are paying 9.62 percent interest. (The rate is reset every six months.) Also, money market funds are beginning to pay higher interest after months of being stuck near zero. High-yield bank accounts, short-term Treasury securities and even some corporate bonds are also options.
Then, when it comes to investing, try to think really long term, meaning a minimum of a decade and, preferably, much longer than that. I wouldn’t put any money into the stock market that you are likely to need to spend soon.
In the past, after big declines, the stock market has always come back. Over 10-year periods, if you had put money into the entire S&P 500 you would have lost money only 6 percent of the time. Over 20-year periods, you would never have lost money.
Above all else, be prepared for the markets to fluctuate. It is clear at this moment that they don’t always rise. In fact, history shows that big declines are a normal part of investing.
Why recent history is deceptive
Bull markets are a far more pleasant than bears, and they are overwhelmingly the predominant experience of people who started investing after March 9, 2009.
That was the day the S&P 500 hit bottom after a 57 percent bear market decline. That terrible fall occurred in the financial crisis that started in 2007. What turned the market around was the Federal Reserve, which cut interest rates to nearly zero, bought up trillions of dollars in bonds and started a bull market in stocks that lasted nearly 11 years.
That glorious time for the S&P 500 ended on Feb. 19, 2020, near the start of the Covid-19 pandemic. There was a brief bear market until the Fed intervened again, and on March 23, scarcely one month later, another bull market began, one that lasted almost two years.
If that is all you know, this year’s bear market may seem a rare aberration, a random downturn in a world where market gains are the norm.
But I think that would be a serious misreading of history. Data provided by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, provides a broader perspective.
Since 1929, the U.S. stock market has been in a bear market nearly 24 percent of the time. Note that in this authoritative accounting, a bear market starts on the first day of declines that become 20 percent downdrafts. According to S&P Indices, the S&P 500 has been in a bear market since Jan. 3, when the decline began.
You may quibble with this definition of a bear market, but the main point is irrefutable: Major market declines have always been an integral part of investing, and if you are going to put your money into stocks, you need to be ready for it.
Recessions happen often
We are in a bear market. We might be in a recession right now, but the economic research bureau doesn’t even attempt to make recession calls in real time.
In the past, it has declared the beginning and the end of recessions somewhere “between four and 21 months” after these events have occurred. As the bureau explains it: “There is no fixed timing rule. We wait long enough so that the existence of a peak or trough is not in doubt, and until we can assign an accurate peak or trough date.”
Economists are great at many things, but predicting recessions isn’t one of them. “Recessions are very difficult to predict,” Ellen Gaske, lead economist at PGIM Fixed Income, said in an interview on Tuesday. “Even if you get one right, chances are you won’t get the next one.”
But we do have precise readings on the dates of past recessions going all the way back to 1854. Using data from the bureau’s website, I did some calculations, with the help of Salil Mehta, a statistician. I found that since 1854, the United States has been in a recession 29 percent of the time. From 1945 through 2020, it was in a recession only 14 percent of the time.
But consider this finding, derived from the data and produced by Mr. Mehta: On any day in the postwar period, the chance that the United States was in a recession or would be within two years was 46 percent.
What does that tell us about the odds of the United States falling into a recession fairly soon? Not much, except that the odds are always reasonably high, and it is wise to prepare.
That said, my own fallible assessment is that it would be a welcome surprise if we don’t have a recession. Sharply rising interest rates, levitating energy prices and steeply falling stock prices have often been associated with recessions.
But even if none of these factors turn out to be important, it is still relevant that recessions occur with dismaying frequency. The Federal Reserve has tried to smooth the economic cycle, but the “great moderation,” a term popularized in 2004 by Ben S. Bernanke, the former Fed chairman, is conspicuous by its absence.
Turmoil is a constant recurrence in the markets and the economy. That’s easy to see when financial and economic disruptions are commonplace but will no doubt be forgotten again. That’s just the way it is.
By the same token, these rough times won’t last. Knowing that may not help much if you are already suffering.
But if the future is anything like the past, it is highly likely that the economy will grow over the long term and that financial markets will produce handsome returns for patient, diversified investors. Understanding that downturns, even severe ones, are an inevitable part of life may even help you avoid some pain down the road.