Despite Friday’s big rally, the longest bull market in history ended last week, almost 11 years to the day from its start. The plunge has shocked investors, coming less than a month after the major U.S. indexes hit record highs.
We’re now in bear market territory for the first time since the financial crisis. The main questions are how low the markets will go and how long this will last.
History tells us that bear markets tend to be short-lived (about 10 months is the norm), with an average price drop of 36 per cent. The 2007-2009 crash was longer (1.3 years according to Investopedia) and deeper (the S&P 500 dropped 50.9 per cent before the carnage was over).
But these are not normal times. No one knows how long the coronavirus crisis will continue or what its ultimate impact on the economy will be. It seems clear that it will plunge the world into a recession – we may be there now but we’ll have to await the numbers for verification. But how deep will it be and how long it will continue is a matter of pure speculation.
Optimists are hoping for a V-shaped recovery. That’s based on the unproven theory the virus will be slowed by the advent of warmer weather and the economy will snap back in the second half.
Pessimists see the virus continuing to spread and an Italian-like shutdown in most parts of the world that continues for many months.
In the face of such uncertainty, what should you do?
First, remember that at some point the bear market will end. It always does. Sound companies will still be in business and their stocks will be selling at rock-bottom prices.
Looking back at the financial crisis, investors who held on were richly rewarded when the stock market rebounded. Those who locked in losses took years to recover, and some never did.
If you’ve followed my advice over the years, you have a balanced portfolio that includes a high percentage of bonds, dividend-paying stocks, and some cash. If that is the case, I suggest you take a deep breath and prepare to ride this out. The overall value of your holdings may fall but the bonds will cushion the shock and the dividends will provide cash flow. The time to start to deploy any cash will be when the market rebounds 20 per cent from its low, a signal that a new bull may be underway.
If, on the other hand, you’re holding a lot of marginal securities you may have to consider trimming your losses whenever there is a rally, such as the one we saw Friday. Those stocks tend to underperform the broad market in turbulent times as speculators bail out.
Everyone is living with a lot of stress these days – both financial and health wise. You need to do whatever you can to reduce that stress level. It’s widely believed that stress weakens the immune system, making people more vulnerable to illness.
Health has always been more important than money. The bear market will eventually be history and the value of your portfolio will recover. Keep that in mind in the days to come.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.