What’s a “Bear Market”?
A bear market happens when widespread pessimism leads to falling stock prices. During a bear market, prices tend to fall by a significant amount over an extended period of time which, according to the Wall Street rule of thumb, is usually when stock prices fall by 20% or more. This is more extreme than a “correction,” or a 10% drop in prices. So, What does a bear market mean for investors?
How can we tell if we’re in a global equity bear market?
There are some indications that the US stock market could be entering a bear market or it could just be a case of markets simply being more volatile than in the recent past. The US and global economies are still looking healthy along with corporate earnings growth. In all likelihood, the decline in the markets could be a valuation correction in the markets. On a positive note, it looks like valuations outside US equity markets such as the Eurozone, Asia-Pacific and emerging equity markets can’t fall much further, because interest rates remain very low.
What does a bear market mean for investors?
Bear markets in equity are normal and no one can really predict how long they will last or the extent of their impact on global markets. According to investment experts, the Eurozone equity markets are trading on just 14.4 times 2018 estimated earnings. That’s an earnings yield of 6.9% when European 10-year government bonds offer a fixed yield of below 1%. Trade tensions between the US and China in particular and a stronger dollar have weighed on Asia-pacific and emerging equity markets so that they are even cheaper on 12-13 times 2018 earnings estimates. In plain English, these shares represent good value.
It’s not easy seeing your savings decline in value by 20-25% in a few months. But, that’s the nature of investment markets. Short-term volatility, as we are experiencing now, means very little over a 5-year period. Always remember one of the core investment facts, volatility in markets is no risk when you have a long-term strategy. There will always be periods of volatility and extremes when it comes to certain investments, your job, and the job of your advisor is to figure out what you want to do about it.
What’s the answer?
A good Financial Adviser is there to ensure that emotions don’t make rash decisions. Your adviser is not there to beat the markets, but to get the returns for you. They will have studied the markets over the years, researched investment portfolios, and observed trends that allow them to advise their clients according to their risk tolerance, investment expectations, and personal insights. They will have a strategy in place for each client that will not be derailed by market volatility. An investor with a well-thought-out financial plan will know exactly what risk they can tolerate, how long they can afford to invest for, and what they can expect from their investment. They along with their Financial Adviser will have planned for such eventualities so they are not panicked in the event of a downturn in the markets.
Don’t ignore the value and benefits of engaging an objective financial adviser. They can help keep you focused and your plans on track, especially in times of a bear market when investors tend to let their emotions get the better of them.
Economists estimate bear markets tend to last less than 15 months. Bull markets on the other hand tend to continue for more than 25 months. Returns during bull markets tend to grow more than they fall during bear markets. https://edition.cnn.com/2018/11/19/investing/stocks-bear-market-morgan-stanley
This post is intended for information purposes only and should not be interpreted as financial advice. You should always obtain your own independent financial and legal advice based on your own particular circumstances, before entering into any financial contract.