The 411 On Recessions And Bear Markets
By Todd Youngdahl, CFP®
As 2019 winds down, many investors fear our 10-year-old bull market is quickly turning into a bear market. And if it does turn into a bear market, what does that mean? Are we on the verge of another recession like the one we had in 2008?
In light of all these concerns, today we’ll give you the 411 on recessions and bear markets so you can know if there’s anything to be concerned about at this time.
What Is A Bear Market?
A bear market happens when an overall market benchmark, such as the S&P 500, dips by 20% or more from its most recent high. (1) This is often accompanied by negative investor sentiment and more selling than buying.
It’s important to highlight that normal stock market volatility isn’t an indicator of a bear market. Normal dips and swings are necessary for long-term growth and shouldn’t be cause for concern.
What Is A Recession?
A recession is defined as two consecutive quarters of economic decline (emphasis on the word economic). They’re measured using factors such as the employment rate, gross domestic product, bond yield curves, and other factors independent of the stock market. (2)
Economists declare recessions retroactively. For example, the Great Recession wasn’t confirmed until November 2008—11 months after it started. (3)
Bear Markets Vs. Recessions: How Are They Related?
A bear market relates to the stock market. A recession relates to the economy. Contrary to popular belief, the stock market is not the economy. Investor emotions are what drives the stock market—which, as we all know, can be fickle. As humans, we have a tendency to be overly optimistic when there’s no data to support our feelings, and pessimistic when data looks great.
Recessions are the complete opposite. Tangible factors determine the state of our economy. There’s no emotion involved. Which begs the question: Why do people correlate recessions and bear markets?
If you look back on history, recessions and bear markets have usually occurred around the same time. Of the last 11 S&P 500 bear markets we’ve had since 1957, 63.6% came after a recession. (4) The two go hand in hand, but they’re not the same.
Can We Really Tell If We’re Entering A Recession?
Not even highly educated economists can predict a bear market or recession. There’s a lot of speculation that goes on in the news, but it’s just that, speculation.
The best thing to do as an investor is to find an optimal portfolio that balances your comfortable level of risk and return. The actions you take in the stock market should be independent of whether economists think we’re entering a bear market or recession.
How We Help
The worst thing you can do is sell everything in the face of an economic downturn. At Washington Wealth Advisors, we specialize in helping people create a solid investment strategy that carries them through the good times and the bad. Instead of focusing on factors we can’t control (such as the stock market or economy), we turn our attention to you, our valued client, to ensure your portfolio aligns with your total financial picture and risk tolerance. To learn more about our services, call our office at 703.584.2700 or email firstname.lastname@example.org.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.