Bear markets and recessions happen more often than you think

Spending money can be a delight. But lose it? If you’re watching large portions of your hard-earned savings disappear, losing money it can be pure misery.

That is why the headlines announcing the arrival of a bear market They have been so disturbing. Strictly speaking, a bear market is simply Wall Street parlance for a stock market decline of at least 20 percent. But this is not just a question of numbers. The technical meaning of the term does not 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 changes, as it eventually will, considerably more wealth will go down the drain. Panicking only makes things worse. For those who are suffering huge losses for the first time, a bear market can be the destruction of dreams, a time of suffering and pain.

However, much bigger problems could arise for the millions of people who have never been able to save enough money to lose it in the stock market. A recession may well be on the way. The United States has been in a recession 14 percent of the time since World War II, according to data provided by the National Bureau of Economic Researchthe quasi-official entity that declares when recessions begin and end in the United States.

With the Federal Reserve lifting the benchmark fed funds rate 0.75 percentage point on Wednesday, forecasting further hikes to combat fury inflation, we could certainly be headed for another recession. The Federal Reserve also paring the bonds and other securities he accumulated on his $9 trillion balance sheet to fuel the economy. In a change of policy, he is now dedicated to “quantitative adjustment”, 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 spreads throughout the economy and lasts for more than a few months,” according to the Bureau of Economic Research.

But basically, a recession amounts to this for millions of people, many of whom are completely indifferent to the vagaries of the stock and bond markets: Working people will lose their jobs. jobsmillions of families will be short of money and countless people will suffer setbacks in their physical Y mental health.

This is kind of shady. 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 recognize that bear markets and their much more troublesome cousins, recessions, are No rare or truly unexpected events, even if the relative calm of the past decade may fool us into thinking so.

Despite the best efforts of policymakers, history shows that both bear markets and recessions are as common as severe storms in New York. Learn to live with them, as much as you do with bad weather.

Stocks don’t always go up. The risk is always present.

This may seem like a banal idea, however, it is never fully understood until market crashes hurt, only to be ignored or forgotten when the next boom hits.

Try to take as much risk as you can tolerate. Long ago, I stopped investing in individual stocks and bonds, eliminating the risk of holding the wrong security at the wrong time. Instead, I prefer low-cost, diversified index funds that allow me to hold a piece of the entire global stock and bond market. And I have reduced my exposure to stocks as I have aged and increased my bond holdings. Bonds haven’t been doing well lately, but Treasuries and high-quality corporate bonds are still much more stable than the stock market.

Before investing, try to save enough money to survive an emergency and keep it in a safe place. If you’ve already managed to accumulate some cash, I’ve outlined some reasonable places maintain it, especially in this period of strong inflation.

include i bondsthat are issued by the Treasury Department and are paying 9.62 percent interest. (The rate resets every six months.) Also, money market funds are starting 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 really think long term, which means a minimum of a decade and preferably much longer than that. You wouldn’t put any money into the stock market that you probably need to spend soon.

In the past, after big drops, the stock market has always come back. Over 10-year periods, if he had put money into the entire S&P 500, he would have lost money only 6 percent of the time. Over periods of 20 years, he would never have lost any money.

Above all, be prepared for fluctuations in the markets. It’s clear at this point that they don’t always go up. In fact, history shows that big drops are a normal part of investing.

Bull markets are much more enjoyable than bear markets, and they are overwhelmingly the predominant experience of people who started investing after March 9, 2009.

That was the day the S&P 500 bottomed out after a 57 percent bear market decline. That terrible crash occurred in the financial crisis that began in 2007. What turned the market around was the Federal Reserve, which cut interest rates to near zero, bought trillions of dollars in bonds, and started a bull market in stocks that lasted almost 11 years. .

That glorious moment for the S&P 500 ended on February 19, 2020, near the start of the Covid-19 pandemic. There was a brief bear market until the Fed stepped in again, and on March 23, just a month later, another bull market began that lasted almost two years.

If that’s all you know, this year’s bear market may seem like a rare aberration, a random downturn in a world where market gains are the norm.

But I think that would be a misreading of history. Data provided by Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, provides a broader perspective.

Since 1929, the US stock market has been in a bear market nearly 24 percent of the time. Note that in this authoritative accounting, a bear market begins on the first day of dips turning into 20 percent downdrafts. According to S&P Indices, the S&P 500 has been in a bear market since January 3, when the decline began.

You may quibble with this definition of a bear market, but the main point is irrefutable: Big market drops have always been an integral part of investing, and if you’re going to invest your money in stocks, you need to be prepared for it.

We are in a bear market. We may be in a recession right now, but the bureau of economic research doesn’t even try to make recession calls in real time.

In the past, it has declared recessions to start and end somewhere “between four and 21 months” after these events occurred. As the office explains: “There is no fixed time rule. We wait long enough for there to be no doubt about the existence of a peak or trough, and until we can assign a precise date for the peak or trough.”

Economists are good at many things, but predict recessions is not one of them. “Recessions are very difficult to predict”, Ellen Gaskechief economist of PGIM Fixed Incomehe said in an interview on Tuesday. “Even if you hit one, chances are you won’t hit the next one.”

But we do have accurate readings on the dates of past recessions going back to 1854. Using data from the office website, I did some calculations, with the help of salil mehtaa statistical. I found that since 1854, the United States has been in a recession 29 percent of the time. From 1945 to 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 given day in the postwar period, the probability that the United States was in a recession or in two years’ time was 46 percent.

What does that tell us about the odds that the United States will slip into a recession fairly soon? Not much, except the odds are forever reasonably high, and it is advisable to prepare it.

That said, my own fallible assessment is that I’d be pleasantly surprised if No have a recession. Sharply rising interest rates, levitating energy prices, and sharply 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 alarming frequency. The Federal Reserve has tried to smooth out 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 common, but they will no doubt be forgotten again. That’s the way it is.

In the same way, these difficult times will not last. Knowing that may not be of much help if you are already suffering.

But if the future is anything like the past, it is very likely that the economy will grow in the long run and that financial markets will produce attractive returns for patient and diversified investors. Understanding that recessions, even severe ones, are an unavoidable part of life may even help you avoid some future pain.

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