Now that the markets are in bear market territory several questions come to mind.
- How long will the bear market last?
- Should one invest in stocks now?
So, should one invest in stocks now? If an investor's goals and objectives, along with portfolio allocation analysis, suggest equities should be a part of an overall portfolio, then value can be uncovered in some stocks. To potentially minimize additional market contraction, using an investment discipline focused on strong dividend growth companies and/or strong cash flow companies, can uncover attractive investment opportunities. An added benefit to owning high quality companies is their stock prices tend to hold up better in down markets.
Back to the first question of how long will the bear market last. No one can accurately predict the actual end date of this current bear market. However one can learn something by looking at the history of past bear markets.
The recent issue of The Outlook ($) newsletter by Standard & Poor's looks at the magnitude and duration of the last nine bear markets since 1956. A common question asked today is what generally occurs after the market declines 20%? S&P notes:
- [the bear markets] have varied in magnitude from the decline of 20% for the market in 1990 to the 48.2% from 1973 to 1974 and the 49.1% from 2000 to 2002.
- History shows that the S&P 500 didn’t cross the 20% threshold until two-thirds of the way through the overall decline.
- From 1956 to 2001, these nine bear markets lasted an average 14 months, yet it wasn’t until the 9th month after the market top that the S&P 500 finally fell into bear market territory. This time was the same as the average: We topped out on October 9, 2007, and crossed into bear market mode almost exactly nine months later.
Who knows if the worst is over, but history would suggest a large part of the decline is already priced into equity prices. Could they go lower? Certainly. However, using a disciplined investment approach could uncover some rewarding investment opportunities.
Breaking the 20% Threshold
Standard & Poor's
By: Sam Stovall
Disclosure: I hold a long position in Wal-Mart and Procter & Gamble.