According to the Chinese calendar, 2020 is supposed to be the year of the rat. But if you ask anyone on Wall Street, they’re more likely to tell you this is the year of the bear.
That’s because a historic drop in stock values has signaled the start of what’s called a “bear market.”
Here’s What You Need to Know About Bear Markets
If you’ve followed the stock market for any length of time, you may remember the historic collapse in values around December of 2008 that was a part of the Great Recession.
As painful as that was, the market recovered and began a slow and steady climb upward in value for 11 years since that low point.
That’s what economists call a “bull market.” It’s a time when the values of equities (stocks) are on the rise.
But just this week, we saw major stock indexes like the Dow Jones Industrial Average and the broader S&P 500 both dip 20% below their February highs. That signals a bear market.
The classic textbook definition of a bear market is any time the value of the stock market falls 20% below previous highs. It’s a step further than a correction, which represents stock values dropping by 10%.
Now That We’re in a Bear Market, What Happens Next?
The important thing when you’re in a bear market as we are now is to realize that it won’t last forever. Recovery will come at some point, though no one can say exactly when.
Our team spoke with certified financial planner Wes Moss and he offered the following level-headed guidance:
“Corrections and bear markets are very frequent and sparked by a variety of negative catalysts. War in the Middle East, world wars, terrorist attacks, natural disasters, assassinations, and yes, multiple pandemics of grand proportion [which] all have one thing in common…the downdraft recovers,” Moss says.
“Markets recover because America recovers. Americans and the stunning resilience of our people and economic system devour every single problem and challenge we face.”
Does a Bear Market Equal a Recession?
Not necessarily. A bear market can take place over a matter of weeks. However, a recession is defined by two consecutive quarters of negative growth in gross domestic product (GDP).
So by its very nature, a recession is something that has to take place over six months. A bear market, meanwhile, can happen is a much shorter time frame.
Furthermore, it’s entirely possible to have bear market conditions without going into recession, and vice-versa.
“If people stop spending money then we will, of course, go into recession,” Moss concedes. “[But] if people
simply slow down their spending for a few months, we will very likely avoid recession.”
What Should I Be Doing With My Money Right Now?
Whenever we’re in a bear market, a certain amount of panic is natural. But if you’re a long-term investor, and won’t need your retirement money for a decade or longer, today’s declines actually benefit you in the long run. Just keep investing on a regular schedule through your 401(k) at work.
“I have made no changes in my investment portfolio and I have no plans to do so by anything I’ve seen to this point,” money expert Clark Howard said in a recent broadcast.
So Clark’s usual guidance remains the same: Stay invested in low-cost index funds and make contributions regularly.
As painful as they are, bear markets are a normal part of capitalism. If you just keep your eye on your long-term retirement horizon, you’ll get through this difficult time.
Meanwhile, visit clark.com/coronavirus for updated financial-related information that you can trust.